The crypto market’s love affair with perpetual futures (perps) is as passionate as it is problematic. While these instruments have become the lifeblood of crypto trading, offering unparalleled liquidity and margin efficiency, they come with a significant caveat: the funding rate.
Why Perps Dominate
For many crypto traders, perpetual futures aren’t just a tool—they’re the only game in town. “Outside bitcoin and ether, dated futures liquidity is thin to the point of being unusable,” said Lucas Krenn, a derivatives trader at market-making firm STS Digital. “So perps are not one tool among several. For a crypto native firm, they are the tool.”
Dated futures, which expire and require rolling over to new contracts, are often too costly and cumbersome for traders. Kenneth Ong, an independent trader with six years of experience, echoed Krenn’s sentiments, highlighting the advantages of perps: better fills, lower fees, and the ability to run both long and short positions simultaneously via hedge mode. “Spot, for me now, is for actually holding something long term,” Ong added.
The Liquidity Advantage
The liquidity of perps is a major draw. Standard dated futures are often illiquid, meaning large orders can easily sway prices, leading to slippage and poor execution. Perps, on the other hand, offer a more stable and predictable trading environment. This liquidity advantage has made perps the go-to instrument for both retail and institutional traders.
Perps and Price Discovery
The always-on nature of perps has shifted price discovery to occur in real-time, not just when traditional markets are open. Ong experienced this firsthand during the Iran conflict in 2026, when tokenized oil trading on Hyperliquid saw a surge in volume over a weekend. “By Monday, a chunk of the repricing already happened on crypto/tokenized commodity perps while the ‘official’ market was closed,” he noted.
This real-time price discovery is a game-changer, especially for tokenized assets. Krenn believes that perps tied to traditional assets will continue to gain traction, as they sidestep the complex legal and regulatory machinery required for traditional share ownership.
The Funding Rate Conundrum
Despite their advantages, perps are not without their drawbacks. The funding rate, a recurring cost for keeping positions open, is a significant concern. Unlike dated futures, which have a fixed interest rate, perps have a floating funding rate that changes every eight hours. This makes it difficult for traders to quantify and hedge their costs.
“It is unquantifiable at the point of trade and unhedgeable afterwards,” Krenn explained. Ong was more blunt: “That funding’s not just some tiny fee you can ignore. It’s not. If you hold positions for long periods, it can potentially balloon to the point where a profitable trade loses money.”
The Asymmetry in Risk
Krenn offered a counterintuitive insight into perp risk: being long is structurally safer. Positive funding is easy to arbitrage away, but negative funding, which is harder to arbitrage, can persist for long periods. “The long side has a bounded cost and an unbounded upside. The short side has a bounded upside and an unbounded cost,” Krenn explained.
The Future of Perps
As the crypto market continues to evolve, perps are likely to remain a dominant force. Ong sees tokenized oil trading over the weekend as a preview of what’s to come for other commodities. “Deepen that liquidity across commodities and equities, and it kills one of the last reasons to bother with dated futures at all,” he said.
However, the funding rate issue remains a significant challenge. Until there is a liquid dated curve in crypto, the market will continue to carry an interest rate exposure it cannot price or hedge. For now, funding is the tax everyone pays for easy access to this leveraged market.
Conclusion
Perpetual futures have democratized futures trading by solving access, cost, and margin efficiency issues. However, the volatile funding-rate exposure remains a unique pain point. As the market continues to mature, addressing this issue will be crucial for the long-term sustainability of perps.
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