When discussing crypto trading with experienced traders, perpetual futures, or 'perps,' are often the first topic of conversation. These derivatives contracts enable traders to control larger positions with less capital. Unlike standard futures, perps have no expiration date, making them a unique and attractive option for traders. For altcoin traders, perps are often the only viable derivatives avenue, as dated futures for these coins are typically illiquid, and the spot market is less relevant for short-term traders.
CoinDesk spoke with traders who have thrived in the perpetual futures market to explore what sets perps apart from other derivatives, how they cater to the needs of both institutional and retail traders, and the costs associated with perps trading. 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 expressed concerns over funding rates, a recurring cost for maintaining open positions. Funding rates can be thought of as an interest charge that accumulates over time, and traders are worried about the potential impact on their profitability.
So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities, particularly for crypto-native firms.
Krenn explained that outside of bitcoin and ether, dated futures lack liquidity, making perps the go-to choice. Kenneth Ong, an independent trader, shared a similar perspective, highlighting the benefits of perps for retail traders, including better execution prices, lower fees, and the ability to hold both long and short positions simultaneously. Both traders emphasized the importance of margin efficiency in perps, which allows for greater trading flexibility and risk management.
The perpetual nature of perps has also shifted price discovery to a 24/7 process, with traders reacting to news and events as they happen, rather than just during traditional market hours. Ong cited the example of tokenized oil trading during the Iran conflict, where perps allowed for more efficient price discovery. Krenn noted that perps have the potential to revolutionize trading in various asset classes, including commodities and equities, by providing a more efficient and accessible way to trade.
However, both traders warned about the risks associated with funding rates, which can be unpredictable and difficult to hedge. Krenn described funding rates as 'unquantifiable' and 'unhedgeable,' making them a significant concern for traders.
Ong was more blunt, stating that funding rates can 'potentially balloon' and turn a profitable trade into a loss. The traders also addressed the criticism that perps are inherently risky, citing the example of the October 10 crash, where exchanges socialized losses to protect their systems. Krenn argued that the issue was not with perps themselves, but rather with the crypto exchange margin model. He emphasized that the key distinction is not between perpetual and dated futures, but rather between exchanges with proper clearing houses and mutualized default funds, and those that socialize losses onto winners.
Krenn also offered an interesting insight into the asymmetry of perp risk, suggesting that being long is structurally safer due to the ability to arbitrage 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. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, particularly the volatile funding-rate exposure. 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.'