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, and they have become a staple in the crypto market.
Unlike traditional futures, perps do not have an expiration date, making them a popular choice among traders. However, they also come with unique challenges, particularly with regards to funding rates. To better understand the world of perps, CoinDesk spoke with traders who have thrived in this market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader. Both traders emphasized the importance of perps in the crypto market, citing their deep liquidity, low fees, and high margin efficiency as major advantages.
According to Krenn, perps are the 'plumbing underneath everything' his firm does, and they are the primary tool for trading crypto assets outside of bitcoin and ether. Ong, who has been trading perps for six years, also highlighted their benefits, including better fills, lower fees, and the ability to run both long and short positions simultaneously.
However, both traders also expressed concerns over funding rates, which can be a significant burden for traders who hold positions for extended periods. Funding rates are essentially interest charges that accrue over time, and they can be difficult to quantify and hedge.
As Krenn noted, 'It is unquantifiable at the point of trade and unhedgeable afterwards.' Ong was more blunt, stating that 'funding's not just some tiny fee you can ignore. It's not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.' Despite these challenges, perps continue to gain popularity, and they are likely to play an increasingly important role in the crypto market.
As Krenn said, 'Until there is a liquid dated curve in crypto, the whole market is carrying an interest rate exposure it cannot price and cannot hedge.' In the meantime, funding rates will remain a major consideration for traders, and it is essential to understand their impact on the market.