What is crypto futures trading



 Learning to invest in all future profits from crypto is quite a challenging endeavour since there is so much to know and the market is far too complex. However, it is important to understand various financial instruments and tools for trading!

Despite occasional downtrends, the crypto market is generally acquiring value over time. It is estimated that its global volume will reach $3 trillion by 2025. The total market value of all adjacent industries and assets not accounted for in current estimations (NFTs being the most prominent example) will be even bigger.

Learning how to invest in all future profits from crypto is quite important due to the vast scope of this continuously evolving domain. While unique new financial assets do exist, in general, the whole market operates like any traditional financial market with many derivative instruments used to speculate. What are crypto futures? In this article, we will answer this question.

The history of futures

The simplest way to describe a future contract is it is a promise to buy something at a predefined price somewhere in the future. Egyptians used them thousands of years ago, but they became widely popular at the beginning of the 12th century in Europe and Asia. With the transition from barter to a money-based economy, people needed to find ways to secure their earnings.

A future contract is a good solution for both farmers and traders purchasing goods from them. For example, a farmer growing rice in Japan could think that by the harvesting time there will be an overabundance of supply and the price will be low. So he finds a trader willing to promise that they will buy rice at a higher price.

Why would a trader be interested in a proposal like this? Natural disasters, shortages in other areas, or low harvest can make rice very expensive. Despite possible losses, a trader always wants to secure supply and count on possible price increases. Both parties benefit from this agreement.

Contracts could be resold to anyone, but the final holder of a future contract is obliged to fulfil the obligation to purchase goods at a price specified in the contract. Regardless of how much you paid for it, you will have to buy rice. Sometimes, you will take it off the hands of a struggling trader. Sometimes, you will overpay slightly believing that the price will skyrocket.

Modern use of future contracts

The global market lives on trading commodities like grain, oil, natural gas, precious metals, etc. Everything depends on prices and quantities of goods moved. Futures are derivative financial instruments that can be based on any commodity or another financial instrument. There are only two conditions: when the contract expires and how much a holder must pay for any given commodity.

Since futures are not exactly goods, there are some interesting nuances to them. For example, many remember that there was a period when oil had negative prices thanks to some bottlenecks in the supply-demand chain and logistical issues. Many holders of futures contracts offered to pay to get rid of them since they would be obligated to only buy oil but also cover expenses related to transportation, storage, and other services.

However, commodities and natural resources are not the only possible bases for a future contract. Any stock, currency, or token could be used just as easily using the same principles. So what is crypto futures trading?

The variety of the cryptocurrency market

One of the aspects of the crypto industry that made it so interesting to both conservative investors and speculators is the variety of financial instruments available for purchasing. Promising hyped-up projects that had an immense potential for dramatic upward and downward trends were a captivating sight to those seeking quick profits.

On the other hand, things like Ethereum and Bitcoin were growing at a much slower pace but offered plenty of opportunities for long-term investors to diversify their portfolios. Such variety was one of the reasons why banks, trust funds, and independent capital holders turned their attention to the developing crypto domain.

However, some traders were left out of the competition due to the increasing price of assets. These people slowly realized that they needed financial leverage to become competitive and earn money quickly with the added benefit of using smaller sums of money to get started. This brings us to the question “How do crypto futures work?”

The underlying financial asset is a certain cryptocurrency. It can be any token, but most exchanges work with established coins like Bitcoin, Litecoin, Ethereum, and others. There are several notable advantages to using a future contract when dealing with tokens:

  • Users don’t need a dedicated wallet, since they don’t own the asset but a contract to purchase it at a later date;
  • Financial leverage provided by exchanges and banks can be used to trade higher volumes of assets;
  • Most contracts have very high liquidity meaning that you will be able to sell or buy quickly.

Note that a crypto future has an expiration meaning that you won’t be able to hold it indefinitely. At some period, the future will be terminated and the exchange of money and goods will be conducted whether you want it or not.

When do Bitcoin futures expire? When you look at a future contract, the expiration date is the foremost point of information often displayed as the main characteristic of the instrument. You will know the date of expiration when money will be transferred to the holder of the underlying asset. You will be subjected to either compensating or receiving the difference between the price of the contract and the price of the asset.

At what time do bitcoin futures expire? This question is a tricky one since different exchanges may have different rules about contracts. Some are issuers of contracts and follow standards determined by the CFTC (Commodity Futures Trading Commission). However, some companies issue their contracts or use different settings. You need to inquire about your exchange to receive more details.

When did Bitcoin futures start?

CME, the largest futures exchange in the world, launched BTC-based futures in 2017. It was a huge deal for all retail traders since margin accounts could be used to purchase crypto and opened doors to the world of digital assets to a much wider audience of investors. Futures issued by CME are traded on various platforms. Notable exchanges that support future trading are Binance, Kraken, and Coindesk.

The former enjoys popularity among the biggest audience with over 30% of the market share. Binance is one of the biggest players in the industry and offers a wide range of financial services to its users.  While many other exchanges provide similar products, we will take a little detour to talk about this particular company.

What is a futures account for crypto? 

Unlike spot trading, futures are available for margin accounts meaning that you can use financial leverage to purchase contracts. You don’t need a separate account on any exchange to get started. Let’s discuss how to trade bitcoin futures on Binance. Most users access the exchange using their mobile apps, but the functionality is even better when using the website.

Both the app and site have specialized sections where you can purchase future contracts:

  1. The app has a “Futures” section in the bottom menu.
  2. The website has “Derivatives” in the upper menu.

To start trading futures, you need to move some of your assets from your spot account to the balance of your account for marginal trading. Currently, stablecoins USDT or BUSD are used to make a purchase. Contracts are available for the vast majority of crypto assets but BTCUSDT, ETHUSDT, and XRPUSDT are more popular. 

One of the biggest advantages of trading at Binance is how flexible you can be when purchasing any amount of coins via contracts. You can use your funds (if you have enough for a contract) or set a specific margin from 1x to 125x, but the max order changes depending on the size of the margin. Here are some examples:

  • When setting a 5x margin, the max order size will be 50 million USDT;
  • When setting a 20x margin, you will be limited to 10 million USDT;
  • At 125x margin, you will be limited to 50 thousand USDT.

You can use one or several margin assets and define whether your order will be considered “cross” (meaning that global marginal settings will be applied) or “isolated” (you specify the margin for this particular order). You can hold short or long positions depending on what your market expectations are and sell or buy whenever you see fit.

The biggest and most obvious drawback is that upon reaching a certain threshold you can no longer tolerate losses and have to give up a position. You can also lose more than you have on your account in rare situations. Another important thing making this particular asset interesting also relates to the question “How do crypto futures work?”

Perpetual swaps: CFD for crypto

Most commodities are traded using futures with specific expiration dates. Quarterly contracts are widely used as a benchmark. However, tracking the price of the underlying asset without any pauses for full exchanges of goods and payments for them was even more useful to high-volume traders and speculators. Contracts for Difference allow us to indefinitely hold any future contract and occasionally make mutual payments to track the difference. CFDs have to be very specific about quantities, thus leverage becomes inflexible. 

Perpetual swaps in crypto work just like that but work for any orders regardless of quantities, leverage sizes, positions, and other parameters. The cryptocurrency market is slightly different from other financial markets and suffers from fewer regulations allowing for distinct differences between CFDs and future contracts derived from a certain coin or token.

Crypto futures trading explained: the mechanics

On most exchanges, settlements (funding) occur every 8 hours. Rules of perpetual contracts specify that settlements must be conducted daily and dividends should be paid from shorts to longs. However, cryptocurrencies are traded around the clock removing the necessity for daily settlements. These rules are usually employed by exchanges like Binance which are usually not subject to any regulations and encourage taking higher risks for bigger profits.

Two other noteworthy factors differentiate between CFDs and perpetual:

  • Fixed interest rates. Since repurchase is not a thing for crypto, most exchanges have fixed interest rates instead of overnights.
  • Many exchanges conduct settlements in cryptocurrencies from which they are derived from. It means that these contracts are so-called “inverse futures”.

Some think about how to invest in Bitcoin futures, but do not understand some ramifications that naturally come with the absence of central counterparty clearing companies that take on risks related to settlements between parties. Most financial institutions simply do not want in highly volatile environments where prices can change dramatically during one 8-hour period.

If an exchange fails to liquidate an asset at a profit during a price surge or a sudden downward trend, the profiting sides must be paid from the insurance fund which is usually formed by surpluses that happen when an exchange liquidates for a bigger profit. However, when such funds are depleted (which might happen in many scenarios for separate contracts and on a much wider scale), auto-deleveraging takes place.

The latter is a specialized system in which traders that are going to lose the most will have a priority to close their positions at the lowest possible price preventing them from defaulting. Risky traders are punished in such systems but the overall counterparty risk is reduced to the minimum creating a safer environment for investing, at least on paper.

Cryptocurrency futures explained: what’s with the inversion?

Usually, contracts are settled in fiat money. The crypto market is different since most futures are presented as [ASSET]USDT. Instead of fiat, stablecoins are used to settle contracts. This creates another layer of risk for traders. While stablecoins are conceived as exchange mediums that should be closely tied to USD, stories like one with LUNA show that stability is often referenced but not achieved.

In most cases, to learn how to trade crypto futures, you have to buy USDT first. Then, use USDT on your balance to purchase a contract. When you need to withdraw funds, you will have to go through a couple of extra steps adding time and effort, as well as more risk, to the whole ordeal.

Binance has a special product called COIN-M Futures referring to both perpetual and quarterly contracts that are settled using the underlying asset. This is called inversion meaning that the exchange uses tokens instead of stablecoins which can be beneficial when you hold tokens and want to use them directly.

How do crypto futures work?

One of the biggest questions that many traders have is how the market allows such finances to even exist. The answer is quite simple. Cryptocurrency remains a highly volatile domain that attracts two kinds of people: speculators and long-term investors. The latter are outnumbered by the former forcing the market to introduce risky, leverage-based products.

If you want to remain within the limitations of a regulated market with at least some protection from the CFTC, make sure to register at an exchange that falls under its authority. Otherwise, a plethora of options are available to those interested in riskier trading with big leverages.

Where to trade Bitcoin futures

The industry offers a rich selection of different trading platforms where you can trade futures. Let’s take a look at some of them:

  • OKX is an international service with a daily volume of close to $16 billion. It is a Chinese privately owned company with headquarters in Seychelles. Despite being tainted by some controversies, it is still one of the biggest exchanges in the world catering to predominantly Asian audiences.
  • ByBit boasts over 6 million registered users and a noteworthy $8 billion daily trading volume placing it firmly at the TOP10 in the derivatives trading domain. With headquarters in Singapore and offices in Hong Kong, it is also one of the platforms used mostly by Asian traders.
  • Binance is the biggest exchange in the industry and boasts a huge $43 billion 24h volume. Launched in 2017, it quickly became the go-to option for most traders from Europe, Northern Africa, the CIS region, and the Americas. The company has a diverse range of products and has very low fees.
  • FTX is another platform that does not feature P2P or spot trading but offers a wide range of crypto derivatives including future contracts. With a sizeable $5.5 billion daily trading volume it is a respected company with a long Forex and Options history.
  • Crypto.com is one of the most popular spots and P2P exchanges that recently introduced futures trading to its list of products. While not the biggest player in the industry, it is still a good option for those who already use it for other purposes.
  • CME Group is a long-awaited entity that entered the market recently but already made decisive marketing and PR moves. As the biggest global exchange for derivatives, it was expected to make a move toward the inclusion of cryptocurrency-based derivatives in its impressive list of financial instruments. 

What is crypto futures trading for modern investors?

You can look at this particular financial instrument as an efficient tool for speculation. With highly volatile prices, cryptocurrencies can be incredibly potent as underlying assets for perpetual futures that rely on quickly making a profit. Increased margins also allow for more significant gains over shorter periods. However, risks must be accounted for.

It is hard to find any place for crypto futures in a balanced portfolio. Due to the risky nature of the derivative, it tends to attract “all-in” types of traders. It is by design. People who want to use more conservative, safer instruments should look at P2P platforms and exchanges where actual assets are being traded.


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