When discussing crypto trading with experienced traders, the conversation often revolves around perpetual futures, or 'perps' – a type of derivatives contract that enables traders to control large positions with minimal capital. Unlike traditional futures, perps do not have an expiration date, making them a popular choice among traders.
For altcoin traders, perps are often the only viable option for derivatives trading, as dated futures for these assets are typically illiquid. CoinDesk spoke with traders who have thrived in the perpetual futures market to gain insight into what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the associated costs of perps trading. The traders unanimously praised perps for their deep liquidity, low trading fees, and efficient margin usage. However, they also expressed concerns over funding rates, which are recurring costs associated with keeping positions open.
Funding rates can be thought of as interest charges that accumulate over time, and traders are worried about the potential impact on their profits. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the backbone of their trading operations.
'Outside of bitcoin and ether, dated futures liquidity is thin to the point of being unusable,' Krenn explained. 'Perps are not just one tool among many; for a crypto-native firm, they are the primary tool.' Kenneth Ong, an independent trader, shared a similar perspective, 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 noted that perps offer a significant advantage over traditional futures, as they allow traders to hold both bullish and bearish bets on the same token in the same account. Both Krenn and Ong emphasized that margin efficiency is a major draw for perps, as they require only a fraction of the position's value as collateral.
This enables traders to split their capital across multiple venues and tokens, making it easier to manage risk. The perpetual nature of perps has also shifted the dynamics of price discovery, allowing it to occur at any time, rather than being limited to traditional market hours.
Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume, with much of the price reaction occurring on crypto/tokenized commodity perps while traditional markets were closed. Krenn believes that perps will continue to gain traction in the coming years, as they offer a powerful tool for traders looking to tap into new asset classes.
However, both traders cautioned that funding rates pose a significant risk, as they can be difficult to quantify and hedge. 'It's not just a tiny fee you can ignore,' Ong warned.
'If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' The issue of funding rates is complex, and traders often struggle to price and hedge against it. Krenn noted that being long is structurally safer, as positive funding is easier to arbitrage away. However, when funding rates are negative, the arbitrage process is more challenging, and the gap between perp and spot prices can persist.
This asymmetry is often overlooked in risk models, and Krenn pointed to the example of lending protocol Euler's token, where funding on the perp went deeply negative, with shorts paying significant fees to longs. In conclusion, perps have democratized futures trading by providing access, cost savings, and margin efficiency, but they also come with unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn put it, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.'