Understanding futures contracts is essential for navigating the crypto markets. Let's break it down step by step.
Spot Contracts in Traditional Markets
Spot trading involves immediate exchange of goods for payment ("cash on delivery"). In contrast, futures contracts allow parties to agree today on terms for future transactions. These agreements specify:
- Delivery date (future timeframe)
- Agreed price (fixed regardless of market fluctuations)
- Quantity/quality of the underlying asset
Example: Wine Futures Contract
Consider a wine merchant (Seller A) and a collector (Buyer B) negotiating a 20-year vintage deal:
| Contract Terms | Buyer Expectation | Seller Expectation | Agreed Price |
|---|---|---|---|
| 2-month delivery | Price rises to $120 | Price falls to $60 | $80 |
Risk Scenarios:
- If market price drops to $60, buyer defaults → seller loses $40 revenue
- If market jumps to $120, seller defaults → buyer pays $80 extra
These private "forward contracts" carry counterparty risks since no central authority enforces compliance.
Key Features of Crypto Futures
Standardized Contracts
Exchanges streamline trading by predefining contract specifications. For BTC/USDT perpetual contracts:
| Parameter | Value |
|---|---|
| Contract size | 0.001 BTC |
| Minimum order | 1 contract |
| Expiry | None (perpetual) |
| Initial margin | 1% (100x leverage) |
| Maintenance margin | 0.5% (200x max) |
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Leverage Mechanics
Example using 100x leverage:
- Initial capital: $5,000
- Position size: $500,000 (100x)
- Profit scenario: 10% price move → $50,000 gain (1000% ROI)
- Loss scenario: 0.2% drop → $1,000 loss (20% of capital)
Risk Management Tools
- Mark price: Average across major exchanges
- Funding fees: Paid every 8 hours to balance longs/shorts
- Liquidation: Triggered when margin ≤ maintenance level
Contract Types Compared
| Feature | Futures Contracts | Perpetual Contracts |
|---|---|---|
| Expiry | Fixed delivery date | Continuous trading |
| Pricing | Tracks spot at expiry | Uses funding mechanism |
| Maintenance | Requires rollovers | No expiration management |
Trading Modes
| Mode | Description | Risk Profile |
|---|---|---|
| Isolated | Loss limited to position margin | Lower overall exposure |
| Cross | Entire balance as collateral | Higher liquidation risk |
FAQ Section
Q: How do funding payments work?
A: Payments occur every 8 hours between long/short positions based on the funding rate. Positive rates mean longs pay shorts; negative rates reverse the flow.
Q: What's the difference between mark and index price?
A: Mark price incorporates the funding rate basis, while index price reflects the pure spot average across exchanges.
Q: When should I use isolated margin?
A: When trading volatile assets where you want to limit losses to a predefined amount, isolating risk from your main account balance.
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