The good and the bad of perps, according to crypto traders

§ 01 Executive Snapshot

• What: An exploration of perpetual futures (perps) in crypto trading and their advantages and disadvantages.
• Who: Traders like Lucas Krenn and Kenneth Ong, market-making firm STS Digital.
• Why it matters: Perps are becoming essential for trading in the crypto market, especially for altcoins, due to their liquidity and margin efficiency, but they carry significant risks related to funding rates.

§ 02 Key Developments

• Daily volume of crypto perps averages over $200 billion, indicating high market activity and reliance on this trading instrument.
• Perps offer brutal margin efficiency, allowing traders to control larger positions with less collateral compared to standard futures.
• The funding rate for perps changes every eight hours, creating a recurring cost that traders need to manage, potentially impacting profitability.

§ 03 Strategic Context

• Perps have emerged as a critical trading tool as traditional futures for altcoins are largely illiquid, making them the preferred choice for many traders.
• The rise of perps reflects a broader trend in the crypto market towards continuous trading and price discovery, allowing for more responsive trading strategies outside standard market hours.

§ 04 Strategic Implications

• The immediate market implication is a shift in how traders approach derivatives, with perps becoming the primary tool for both retail and institutional trading in the crypto space.
• Long-term, the adoption and efficiency of perps could challenge the relevance of dated futures and reshape liquidity dynamics across various asset classes in crypto.

§ 05 Risks & Constraints

• A key risk is the liquidation of positions due to margin shortages, which can occur abruptly in volatile markets.
• The fluctuating funding rates present a significant challenge, as they can unexpectedly increase costs for traders holding positions over time, impacting overall profitability.

§ 06 Watchlist / Forward Signals

• Traders should monitor developments in funding rate trends, as significant changes could affect the attractiveness of perps.
• The evolution of dated futures and their liquidity in the crypto market will signal whether perps remain the dominant trading instrument or if new alternatives emerge.