When discussing crypto trading, savvy traders often bring up perpetual futures, or 'perps' - a type of derivatives contract that allows for larger positions with less capital. Unlike standard futures, perps don't have an expiry date, making them appealing for traders of alternative cryptocurrencies where dated futures are illiquid.
Both retail and institutional traders appreciate perps for their deep liquidity, low trading fees, and efficient margin use, which enables greater trading exposure with less collateral. However, traders are also concerned about funding rates - recurring costs for keeping positions open that can add up over time. The necessity of perps is highlighted by their daily volume of over $200 billion, with traders citing the lack of liquidity in dated futures outside of bitcoin and ether. Perps offer better fills, lower fees, and the ability to hold both long and short positions simultaneously.
Despite these advantages, the funding rate poses a significant risk, as it can change over time and is typically charged every eight hours, leaving traders exposed to a floating rate. Experienced traders warn that this rate can become a substantial burden if the market doesn't move as expected, potentially turning a profitable trade into a loss.
The issue of funding rates is further complicated by the difficulty in quantifying and hedging this exposure. As the crypto market continues to evolve, the role of perps and their associated risks will remain a critical aspect of trading, with many expecting the 'perpification' of various assets to gain momentum in the coming years.