The Double-Edged Sword of Perpetual Futures: Benefits and Drawbacks

When discussing crypto trading with experienced traders, the topic of perpetual futures, or 'perps,' often comes up. These derivatives contracts allow traders to control large positions with minimal capital. Unlike standard futures, perps have no expiration date, making them a unique and attractive option for both retail and institutional traders. For altcoin traders, perps are often the only viable derivatives market, as dated futures for these assets are typically illiquid. Traders appreciate perps for their deep liquidity, low trading fees, and efficient margin usage, which enables them to manage risk effectively. However, there is a recurring cost associated with keeping positions open, known as funding rates, which can add up over time. The traders interviewed emphasized that perps are not just one tool among many, but rather a necessity for crypto-native firms. They offer better execution, lower fees, and the ability to hold both long and short positions simultaneously. The perpetual nature of perps has also shifted price discovery, allowing traders to react to news and events in real-time, rather than being limited to traditional market hours. Despite the benefits, traders are concerned about the funding rate, which can be unpredictable and difficult to hedge. This exposure to floating interest rates can become a significant burden, especially for long-term positions. The traders warned that funding rates should not be ignored, as they can potentially turn a profitable trade into a loss. The recent bitcoin bear market highlighted the risks associated with perps, as exchanges socialized losses to protect their systems, resulting in widespread liquidations. However, the problem was attributed to the crypto exchange margin model, rather than the perps themselves. The distinction between perpetual and dated futures is not as important as the presence of a proper clearing house with a mutualized default fund. One trader noted that being long is often the structurally safer side, as positive funding can be easily arbitraged away, whereas negative funding can persist due to constrained arbitrage opportunities. This asymmetry is often overlooked in risk models, and funding rates can remain extremely high or low for extended periods. In conclusion, perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, but they also come with unique challenges, such as volatile funding-rate exposure. Until a liquid dated curve is established in crypto, the market will continue to carry an interest rate exposure that cannot be priced or hedged.