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, offering a key advantage over traditional futures: no expiration date. For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures contracts for these assets are often illiquid. Spot markets are also less relevant for traders who don't plan to hold onto their assets long-term.
To better understand the appeal of perps, we spoke with traders who have thrived in this market. They highlighted the deep liquidity, low trading fees, and high margin efficiency of perps, which enable traders to maximize their exposure while minimizing capital requirements.
However, traders also expressed concerns about funding rates, which are recurring costs associated with keeping positions open. These rates can add up over time and negatively impact trading profits. The popularity of perps can be attributed to their necessity, rather than choice. Lucas Krenn, a derivatives trader at STS Digital, noted that perps are the primary tool for crypto-native firms, as dated futures contracts often lack liquidity.
Kenneth Ong, an independent trader, echoed this sentiment, citing the benefits of perps for retail traders, including better fills, lower fees, and the ability to hold both long and short positions simultaneously. Both Krenn and Ong emphasized the importance of margin efficiency in perps, which allows traders to manage risk across multiple venues and tokens with minimal capital.
The perpetual nature of perps has also shifted price discovery to a 24/7 process, with news and events influencing prices at any time. This has led to increased trading activity in perps, even during traditional market hours. While perps offer many advantages, they also come with unique challenges, such as funding rate exposure, which can be difficult to quantify and hedge. Traders must carefully consider these risks when engaging in perps trading.
In conclusion, perps have democratized futures trading by providing access to leveraged markets, but they also introduce distinct pain points, such as volatile funding rate exposure. As the crypto market continues to evolve, it is essential for traders to understand the benefits and drawbacks of perps and develop strategies to mitigate their risks.