The Dual Nature of Perpetual Futures in Crypto Trading

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. Unlike standard futures, perps do not have an expiry date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable avenue for derivatives trading, as dated futures for these assets are typically illiquid, and the spot market is not a practical choice for those who don't plan to hold their assets long-term. CoinDesk spoke with traders who have thrived 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 agreed that perps offer deep liquidity, low trading fees, and efficient margin usage, making them an essential tool for managing risk. However, they also highlighted the concern of funding rates, which can accumulate over time and impact trading costs. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of their operations, particularly for assets outside of bitcoin and ether, where dated futures liquidity is scarce. Kenneth Ong, an independent trader, echoed this sentiment, stating that perps provide better execution, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized that margin efficiency is a significant advantage of perps, allowing them to manage risk effectively across various venues and tokens. The perpetual nature of perps has also shifted price discovery, enabling traders to react to news and events in real-time, rather than waiting for traditional market hours. While perps offer many benefits, traders are wary of the funding rate, which can be unpredictable and difficult to hedge. Krenn and Ong warned that the funding rate can become a significant burden, especially for traders who hold positions for extended periods. In fact, Krenn believes that the funding rate is a more pressing concern than liquidations, which are often cited as a major risk associated with perps. The traders also discussed the concept of 'perpification' of various assets, which is gaining momentum and could potentially replace dated futures. However, they cautioned that the funding rate exposure remains a unique pain point for perps, which cannot be quantified or hedged. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they are not without their challenges, particularly the volatile funding-rate exposure that traders must navigate.