The Dual Nature of Perpetual Futures: Benefits and Drawbacks According to Crypto Traders

When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic that comes up. These derivatives contracts enable traders to control larger positions with less capital. Unlike standard futures, perps do not have an expiration date, making them an attractive option for traders. For altcoin traders, perps are often the only viable derivatives market due to the illiquidity of dated futures and the spot market. CoinDesk spoke with traders who have thrived in the perps market to understand what makes them unique and how they cater to the needs of both institutional and retail traders. The traders praised perps for their deep liquidity, low trading fees, and efficient margin usage, which allows for greater trading exposure with less collateral. However, they also expressed concerns about the funding rates, which are recurring costs associated with keeping positions open. Funding rates can be seen as an interest charge that accumulates over time, and traders are worried about their potential impact on trading costs. Traders attribute the popularity of perps, with daily volumes exceeding $200 billion, to their necessity rather than choice. Lucas Krenn, a derivatives trader, explained that perps are the primary tool for crypto-native firms due to the lack of liquidity in dated futures outside of bitcoin and ether. Kenneth Ong, an independent trader, highlighted the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows for more efficient risk management across different venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events outside of traditional market hours. However, traders are cautious about the funding rates, which can be unpredictable and burdensome. Krenn and Ong warned that funding rates can be a significant concern, especially for long-term positions, and that they can potentially turn profitable trades into losses. The traders also discussed the distinction between perps and dated futures, emphasizing that the key difference lies in the exchange's margin model and risk management practices rather than the type of futures contract. Krenn noted that being long is often the structurally safer side due to the ease of arbitraging away positive funding rates, whereas negative funding rates can persist due to constrained arbitrage opportunities. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, such as volatile funding-rate exposure, which can be difficult to quantify and hedge.