What Is the Primary Risk of Using Perpetual Swaps for Hedging Cryptocurrency Volatility?

The primary risk is the funding rate mechanism, which can introduce unpredictable costs or gains. Perpetual swaps lack an expiry date, so the funding rate is used to keep the contract price close to the underlying asset's spot price.

If the funding rate is consistently against the hedger's position, the cost of maintaining the hedge can become substantial, eroding profits or increasing losses. Liquidation risk from margin calls is also a key concern.