When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts allow traders to control large positions with minimal capital, but they also come with unique challenges. To understand what makes perps different from other derivatives and how they cater to the needs of both institutional and retail traders, CoinDesk spoke with traders who have thrived in the perpetual futures market. Their responses highlighted the key benefits of perps, including deep liquidity, low trading fees, and efficient margin usage, which enables traders to maximize their exposure with minimal collateral.
However, traders also expressed concerns about the funding rates associated with perps, which can add up over time and impact the profitability of trades. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures for altcoins. Kenneth Ong, an independent trader, echoed this sentiment, citing the advantages of perps for retail traders, including better fills, lower fees, and the ability to run both long and short positions simultaneously.
Both traders emphasized 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 always-on nature of perps has also shifted price discovery to occur around the clock, rather than just during market hours. This has led to the 'perpification' of various assets, with traders expecting this trend to gain momentum in the coming years.
Despite the benefits of perps, traders are wary of the funding rate, which can be unpredictable and burdensome. Krenn and Ong warned that the funding rate can potentially balloon to the point where a profitable trade becomes unprofitable.
The lack of a built-in mechanism to lock in the funding rate exposes traders to floating rates, making it difficult to quantify and hedge against. In conclusion, while perps have democratized futures trading by providing access, low costs, and efficient margin usage, they are not without unique challenges, particularly the volatile funding-rate exposure. As Krenn noted, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'