The Double-Edged Sword of Perpetual Futures: Insights from Crypto Traders

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 standard futures, perps do not have an expiration date, making them a unique and attractive option for traders. However, they also come with their own set of challenges, particularly regarding funding rates. To better understand the world of perps, we spoke with traders who have thrived in this market, including Lucas Krenn, a derivatives trader at STS Digital, and Kenneth Ong, an independent trader with extensive experience in perps. According to Krenn, perps are the 'plumbing underneath everything' his firm does, especially when it comes to altcoins, where dated futures are often illiquid. Ong, who has transitioned from spot trading to perps, highlights the benefits of better fills, lower fees, and the ability to run both long and short positions simultaneously. Both traders emphasize the importance of margin efficiency in perps, which allows for greater trading exposure with less capital. However, they also express concern over funding rates, which can be a significant expense for traders. Unlike dated futures, where the interest rate is known upfront, perps have a funding rate that changes over time and is typically charged every eight hours. This makes it difficult for traders to quantify and hedge their exposure. As the crypto market continues to evolve, the use of perps is likely to grow, with traders like Ong predicting that tokenized oil trading is just the beginning. Nevertheless, the funding rate remains a major concern, and traders must be aware of its potential impact on their trades. In conclusion, perps have democratized futures trading by providing access, cost efficiency, and margin efficiency, but they also come with unique challenges, particularly regarding funding rate exposure. As Krenn notes, 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.