Perpetual futures, or perps, have become indispensable for crypto traders, with daily volumes surpassing $200 billion. This dominance comes from the unique advantage perps offer: no expiry date, allowing traders to hold positions indefinitely without rolling contracts. Yet, this convenience comes at a cost that both retail and institutional players keep a close eye on funding rates.
Why Traders Rely on Perpetuals
Outside of Bitcoin and Ethereum, the liquidity for dated futures contracts on altcoins is often so low that they become impractical. Lucas Krenn, a derivatives trader at STS Digital, calls perps the "plumbing" of their operations. Unlike futures contracts that expire and must be replaced, perps maintain continuous liquidity, making them essential for firms specializing in crypto.
The cost of rolling dated futures contracts at expiry adds inefficiencies, a problem that has long plagued futures-based ETFs compared to spot ETFs. With perps, traders enjoy deep liquidity and low trading fees, which translate to better margin efficiency more exposure for less collateral.
The Hidden Expense: Funding Rates
Every perp position carries a funding rate a recurring fee paid between longs and shorts that reflects market sentiment. Though trading fees are low, funding rates can accumulate substantially over time, acting like an interest charge for holding positions. This ongoing cost worries many traders, as it can erode profitability, especially during volatile market phases.
Perps offer unmatched flexibility and market access, but understanding the impact of funding rates is key. Traders who master this balance can harness the benefits of perps without falling prey to unexpected costs.
This material is informational and does not constitute financial advice.
