When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' inevitably comes up. These derivative contracts enable 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 derivatives market, as dated futures are typically illiquid and spot markets are less relevant for short-term trading. CoinDesk spoke with traders who have thrived in the perps market to understand what sets them 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 efficient margin usage, which allows for greater trading exposure with less collateral.
However, they also highlighted the significance of funding rates, a recurring cost associated with keeping positions open, which can substantially add up over time. According to Lucas Krenn, a derivatives trader at STS Digital, perps are the primary tool for crypto-native firms, as dated futures lack liquidity outside of bitcoin and ether.
Krenn explained that the process of replacing dated futures contracts at expiry is costly, making perps a more efficient option. Kenneth Ong, an independent trader, echoed Krenn's sentiments, stating that perps offer better execution, lower fees, and the ability to hold both long and short positions simultaneously. Ong noted that the hedge mode in perps allows traders to maintain separate long and short positions on the same token, a feature not typically available in regulated venues like the CME.
Both traders emphasized the importance of margin efficiency in perps, which enables traders to manage risk across multiple venues and tokens with greater ease. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. Ong cited the example of tokenized oil trading during the Iran conflict, where prices adjusted in real-time, even when traditional markets were closed.
Krenn and Ong also discussed the 'perpification' of various assets, predicting that this trend will continue to gain momentum in the coming years. However, they warned about the risks associated with funding rates, which can be unpredictable and burdensome for traders. Krenn noted that funding rates can be unquantifiable at the point of trade and unhedgeable afterwards, making them a significant concern for traders. Ong bluntly stated that funding rates can potentially turn a profitable trade into a loss if left unmanaged.
The traders also addressed the criticism of perps following the October 10 crash, which triggered widespread deleveraging and liquidations. Krenn argued that the issue was not with perps themselves, but rather with the crypto exchange margin model, which socializes losses onto winners. He emphasized that the key distinction lies not between perpetual and dated futures, but between exchanges with proper clearing houses and mutualized default funds, and those that socialize losses. Krenn offered a contrarian view on perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding rates.
However, when funding rates are negative, the arbitrage process is more complex, and the gap between perp and spot prices can persist. This asymmetry, Krenn noted, is often overlooked in risk models. In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they also introduce unique challenges, particularly with regards to funding-rate exposure. As Krenn put it, the entire market is carrying an interest rate exposure that cannot be priced or hedged until a liquid dated curve emerges in crypto.