When discussing crypto trading with experienced traders, perpetual futures, also known as 'perps,' are often the first topic that comes up. These derivative contracts enable traders to control large positions with minimal capital. Unlike standard 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 due to the illiquidity of dated futures and the spot market.
CoinDesk spoke with traders who have thrived in the perpetual futures market to gain insight into what makes perps unique 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.
However, they also expressed concerns over the recurring cost of keeping positions open, known as funding rates, which can add up over time. So, why do traders prefer perps? According to Lucas Krenn, a derivatives trader at STS Digital, perps are the foundation of their trading activities.
'Outside of bitcoin and ether, dated futures liquidity is extremely thin, making perps the primary tool for crypto-native firms,' Krenn explained. 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 regulated venues like the CME, which typically net positions by default. Both Ong and Krenn emphasized that margin efficiency is the primary draw to perps, allowing traders to manage risk efficiently across different venues and tokens.
Perps require only a fraction of the position's value as collateral, enabling traders to split their capital across multiple venues and maintain meaningful positions. The perpetual nature of perps has also shifted price discovery to occur around the clock, rather than only during market hours. Ong recalled an instance during the Iran conflict, where tokenized oil trading on Hyperliquid saw a significant surge in volume over a weekend, with the majority of the price reaction occurring on crypto/tokenized commodity perps while traditional markets were closed.
Krenn sees this mechanism playing out in perps tied to other traditional assets, such as tokenized equities. However, traders are wary of the funding rate, which can change over time and is typically charged every eight hours.
This exposes traders to a floating rate while holding a position, with no built-in mechanism to lock it in. Krenn and Ong both expressed concerns over the funding rate, with Ong stating that it can 'potentially balloon to the point where a profitable trade loses money' if held for extended periods.
The traders also discussed the myth of the 'safe trade,' citing the October 10 crash last year, which triggered widespread deleveraging across both losing and profitable positions. Krenn argued that the problem lies not with perps, but with the crypto exchange margin model.
He emphasized that the distinction between perpetual and dated futures is not the primary concern, but rather whether traders are facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners. Krenn offered an insightful perspective on perp risk, suggesting that being long is the structurally safer side due to the ease of arbitraging away positive funding.
However, when the funding rate is negative, the arbitrage becomes more complex, and the gap between perp and spot prices can persist. This asymmetry is often overlooked in risk models, according to Krenn. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency.
Nevertheless, they 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.'