Discussing crypto trading with experienced traders often leads to a conversation about perpetual futures, or 'perps' - a type of derivatives contract that allows traders to control large positions with minimal capital. Unlike standard futures, perps do not have an expiration date, making them a unique and popular choice among traders. For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures contracts for these assets are typically illiquid.
CoinDesk spoke with traders who have found success in the perpetual futures market to understand what sets perps apart from other derivatives and how they cater to the needs of both institutional and retail traders. The traders unanimously praised perps for their deep liquidity, low trading fees, and high margin efficiency, which enables them to manage risk effectively. However, they also expressed concerns about the funding rates associated with perps, which can add up over time and eat into profits.
So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the 'plumbing underneath everything' his firm does, particularly for assets outside of bitcoin and ether, where dated futures liquidity is scarce. Krenn notes that perps offer a more efficient way to trade, as they eliminate the need to replace contracts at expiry, a process that can be costly. Kenneth Ong, an independent trader, echoes this sentiment, highlighting the benefits of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously.
Ong also emphasizes the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with a single pool of capital. The perpetual nature of perps has also shifted the landscape of price discovery, allowing traders to react to news and events in real-time, rather than waiting for traditional markets to open. This has led to the 'perpification' of various assets, with traders expecting this trend to continue in the coming years.
Despite the advantages of perps, traders are wary of the funding rates, which can be volatile and difficult to predict. Krenn and Ong both express concern about the funding rate, which can become a significant burden for traders who hold positions for extended periods.
The funding rate is typically charged every eight hours and can be a challenge to quantify and hedge. In fact, Krenn argues that the funding rate is a more significant concern than liquidations, which are often cited as a major risk associated with perps. The October 10 crash last year, which triggered widespread deleveraging across the crypto market, highlighted the risks associated with perps, particularly when exchanges socialize losses to protect their own systems.
However, Krenn attributes this issue to the crypto exchange margin model, rather than a problem with perps themselves. He notes that dated futures on the same venues are subject to the same insurance funds and deleveraging queue. Krenn also offers an interesting insight into the asymmetry of perp risk, suggesting that being long is the structurally safer side, as positive funding is easier to arbitrage away. In contrast, negative funding rates can persist for extended periods, making it more challenging for traders to manage their risk.
Ultimately, perps have democratized futures trading by providing access to a leveraged market with low barriers to entry. However, traders must be aware of the unique pain points associated with perps, particularly the volatile funding-rate exposure that can be difficult to quantify and hedge.