Definition of a Futures Contract
{{Infobox Futures Concept
|name=Definition of a Futures Contract |cluster=Basics |market= |margin= |settlement= |key_risk= |see_also= }}
Definition
A futures contract is a standardized, legally binding agreement to buy or sell a specific asset (in this context, a cryptocurrency like Bitcoin or Ethereum) at a predetermined price on a specified date in the future. This mechanism allows traders to lock in a price today for a transaction that will occur later.
Futures trading is a core component of derivatives trading. This topic is part of the broader pillar page Introduction to Cryptocurrency Futures. Unlike spot trading, where assets are exchanged immediately at the current market price (see Giá Giao ngay), futures contracts involve an obligation to transact at a future date.
There are generally two main types of crypto futures contracts:
Term Contracts (Expiry Futures): These contracts have a fixed expiration date. When the date arrives, the contract settles, either physically (delivery of the underlying asset) or, more commonly in crypto, through cash settlement based on the spot price at expiration.
Perpetual Contracts: These contracts have no expiration date. They are designed to mimic the behavior of a traditional futures contract but remain open indefinitely, provided the trader maintains sufficient margin. To keep the perpetual price closely aligned with the spot price, these contracts use a mechanism called the funding rate.
Why it matters
Futures contracts serve two primary purposes in the cryptocurrency ecosystem: speculation and hedging.
- Speculation: Traders use futures to bet on the future direction of an asset's price without owning the underlying asset. They can take long positions (betting the price will rise) or short positions (betting the price will fall).
- Hedging: Holders of physical cryptocurrency can use futures contracts to protect themselves against adverse price movements. For example, a long-term holder might sell a futures contract to lock in a minimum selling price for their assets in the coming months, mitigating the risk of a market downturn.
Futures trading often involves leverage, which magnifies both potential profits and potential losses. Information regarding leverage can be found in Gestión de Riesgo y Apalancamiento en Futuros de Criptomonedas: Consejos Clave.
How it works
When a trader enters a futures contract, they are agreeing to a transaction based on the contract's terms.
Margin and Leverage
Futures trading requires the user to post an initial amount of collateral, known as margin. Leverage allows a trader to control a large contract position with a relatively small amount of capital. For example, 10x leverage means a trader controls $10,000 worth of crypto with only $1,000 of margin. If the trade moves against the trader, losses are amplified by the same factor.
Settlement
The way a contract concludes depends on its type:
- Expiry Futures: On the settlement date, the contract closes. If the contract is cash-settled, the difference between the contract price and the final index price is credited to or debited from the trader’s account.
- Perpetual Futures: These use the funding rate to anchor the contract price to the spot price. If the perpetual price is higher than the spot price (premium), long position holders pay short position holders a small fee, incentivizing selling and pushing the price down toward the spot price. The reverse happens if the contract trades at a discount. Details on funding rates can sometimes be found in data sources like Coinalyze.
Comparison to Other Products
Futures contracts differ significantly from other trading instruments:
- Spot Trading: In spot trading, actual assets are bought and sold immediately. Futures involve an obligation for a future transaction. Crypto Futures vs Spot Trading: Key Differences and When to Use Each Strategy covers this distinction further.
- [[Contracts for Difference (CFDs)]]: While CFDs also allow speculation without asset ownership, they are typically Over-The-Counter (OTC) products. Futures are exchange-traded derivatives with standardized terms.
Practical examples
Consider a trader who believes the price of Bitcoin (BTC) will increase significantly over the next three months.
Scenario 1: Using an Expiry Futures Contract The trader buys a December [[BTC futures contract]] today, agreeing to purchase BTC at $70,000 on the contract's expiry date.
- If, in December, the spot price of BTC is $75,000, the trader profits from the $5,000 difference per coin (minus fees).
- If the spot price is $65,000, the trader incurs a loss of $5,000 per coin, as they are obligated to buy at the agreed-upon $70,000.
Scenario 2: Using a Perpetual Contract The trader opens a long position on a perpetual BTC contract with 5x leverage, believing the price will rise next week. They do not have a set end date. If the price rises, their profits are multiplied by five. If the price drops significantly, their margin may be depleted, leading to liquidation (see How to Trade Futures Without Getting Liquidated).
Common mistakes
Beginners often encounter pitfalls when trading futures, primarily due to the complexity of derivatives and leverage:
- Ignoring Liquidation Risk: Using excessive leverage without understanding margin requirements can lead to the entire margin balance being rapidly lost if the market moves unfavorably.
- Misunderstanding Perpetual Pricing: Failing to account for the funding rate on perpetual contracts can lead to unexpected costs or gains over time, depending on whether the trader is long or short when the market is heavily biased.
- Lack of Hedging Awareness: Traders sometimes treat futures solely as speculative tools without understanding how they can be used defensively to protect existing spot holdings.
Safety and Risk Notes
Trading futures contracts involves substantial risk. The use of leverage amplifies losses, meaning a trader can lose more than their initial investment if the exchange rules permit negative balances, or more commonly, lose their entire margin deposit very quickly through liquidation. Market volatility, including sudden price drops known as Flash crashes, can trigger liquidations rapidly. Traders should only use capital they can afford to lose and must employ disciplined risk management techniques, such as setting stop-loss orders.
See also
- Introduction to Cryptocurrency Futures
- Crypto Futures vs Spot Trading: Key Differences and When to Use Each Strategy
- Guides to margin trading
- How to Use Bollinger Bands in Crypto Futures Trading
- Candlestick Patterns in Futures Trading
References
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