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, functioning similarly to standard futures but without an expiration date.
For traders of alternative cryptocurrencies, perps are frequently the only viable option for derivatives trading, as dated futures contracts for these assets are often illiquid and the spot market is not a priority for those who don't plan to hold onto their assets long-term. To understand what makes perps unique and how they cater to the needs of both institutional and retail traders, CoinDesk spoke with traders who have found success in the perpetual futures market. Their responses highlighted the advantages of perps, including deep liquidity, low trading fees, and high margin efficiency, which refers to the amount of trading exposure achievable per unit of collateral posted.
However, traders also expressed concerns about the costs associated with perps, particularly the funding rates, which can add up over time and are unpredictable. The popularity of perps can be attributed to their necessity, especially for assets other than Bitcoin and Ether, where dated futures contracts lack liquidity.
Lucas Krenn, a derivatives trader, noted that perps are not just one tool among many but the primary tool for crypto-native firms due to their liquidity and efficiency. Independent trader Kenneth Ong echoed this sentiment, pointing out that perps offer better execution, lower fees, and the ability to hold both long and short positions simultaneously through hedge mode, a significant advantage over traditional regulated venues. Both traders emphasized that margin efficiency is a key draw to perps, allowing for the management of risk across different venues and tokens with significantly greater leverage than standard futures.
The perpetual nature of perps has also shifted price discovery, allowing it to occur at any time news breaks, rather than being confined to traditional market hours. This was exemplified during the Iran conflict, where tokenized oil trading saw significant volume surges on weekends when traditional markets were closed. Traders believe that the 'perpification' of various assets will continue to gain momentum, offering a powerful tool for those looking to trade rather than invest long-term. Despite the benefits, traders cautioned about the funding rate, which can be a significant burden, especially for long-term positions.
Unlike dated futures contracts, which have a fixed interest rate, perps have a funding rate that changes over time and is typically charged every eight hours, leaving traders exposed to a floating rate with no mechanism to lock it in. This unpredictability makes the funding rate a cause for concern, as it can potentially turn a profitable trade into a loss. The issue of funding rates is further complicated by the lack of a built-in mechanism to hedge against them, making them unquantifiable at the point of trade and unhedgeable afterwards. The recent bear market and the Oct.
10 crash highlighted the risks associated with perps, particularly the socialization of losses by exchanges, which can lead to the forced closure of both losing and profitable positions. However, traders argue that this is not a problem with perps themselves but rather with the crypto exchange margin model. The distinction that matters is not between perpetual and dated futures but between facing a proper clearing house with a mutualized default fund or an exchange that socializes losses onto winners.
One insight offered by institutional trader Krenn inverts the common assumption about perp risk, suggesting that being long is structurally safer due to the ease of arbitraging away positive funding. However, when the funding rate is negative, the arbitrage involving a long position in the perp and a short position in the spot becomes more difficult, leading to a persistence of the gap between perp and spot prices and potentially extremely negative funding rates for long stretches. This asymmetry, where the long side has a bounded cost and an unbounded upside, while the short side has a bounded upside and an unbounded cost, is not well-represented in most risk models. The example of lending protocol Euler's token, where funding on the perp went deeply negative due to a small and concentrated float, illustrates this point.
In conclusion, while perps have democratized futures trading by addressing issues of access, cost, and margin efficiency, they are not without unique challenges, particularly the volatile funding-rate exposure that cannot be quantified or hedged. As Krenn noted, until a liquid dated curve emerges in crypto, the market will continue to carry an interest rate exposure that it cannot price or hedge, making funding a 'tax' that everyone pays for access to this leveraged market.