Futures Contracts in Crypto – What are they – How to use Them

Published by Thrillmex on

Futures Contracts in Crypto – What are they – How to use Them

If you go to bitmex.com you’ll find these futures contracts highlighted above in yellow.

What are they?


First, What is a contract?

A contract in terms of trading is an agreement between you and another unknown trader trading a derivatives product. Almost all derivatives exchanges trade contracts worth $1 USD each. (Bybit, Bitmex, Deribit etc.)

This means that these derivatives exchanges don’t trade bitcoin, don’t trade USD, don’t trade USDT, they trade contracts with bitcoin as collateral.

For example:

  • You want to long $100 worth of bitcoin. 
  • For this to happen someone needs to be selling $100 worth of bitcoin.
  • So, a ‘contract’ or ‘agreement’ takes place between you, the buyer of $100, and a seller for $100.
  • You are not ‘locked in’ to these contracts with that trader, and can buy and sell these contracts at anytime.
  • Contracts are always 1-1.
  • Meaning you can’t buy 2 contracts for the price of 1 etc.

    Now for a real example of this in action at the derivatives exchange Bybit. We will have a look at their contract details first.

    Above you see;

    • Contract Details – BTCUSD – This is the name of the contract and details that you’re trading the pair BTC/USD or, bitcoin against USD.
    • Contract Value – 1 USD – this is the value each contract represents.

    Here is a position of contracts at the derivatives exchange Bybit.

    To the left is ‘Contracts’ which is indicating the name of the type of contracts being traded. In the green box is ‘Qty’ which indicates the quantity of contracts in your position. ‘Value’ is the amount of bitcoin this represents in USD. ‘Price’ represents the price of bitcoin which you acquired these contracts at.

    To sum it up

    Instead of trading bitcoin or USD at a derivatives exchange, you’re trading contracts. It’s basically just a name for synthetic USD.

    What is a futures contract?

    A futures contract is a contract that has an expiry date. Meaning they are only traded for a certain period of time. On Bitmex they are normally traded for 3 months before they expire, or finish, and a new 3 month futures contract will start again.

    In the yellow highlighted example above, the ‘Mar27’ futures contract finishes on March 27th and the ‘Jun 26’ futures contract finishes on June 26th.

    On March 27th the ‘Mar 27’ futures contract will expire and will stop trading, all open positions will be settled.

    On June 26th the ‘Jun 26’ futures contract will expire and will stop trading, all open positions will be settled.

    More info on Bitmex Futures contracts here.

    Why would you trade a futures contract?

    A futures contract is primarily used for hedging, cash and carry and speculation without paying funding.

    Generally futures contracts are used for hedging your current spot market position or perpetual swap contract position.

    A hedging example:

    • You’re long $100,000 on your perpetual swap contract and want to hedge some risk.
    • You short $20,000 on the futures contract.
    • You’re now effectively ‘net long’ with $80,000.

    Cash and Carry example:

    • You long bitcoin on perpetual swap contracts at $7,000.
    • You short bitcoin on their March futures contract at $7,200.
    • You carry the +2.8% difference and cash in when that futures contract ends.
    • In essence, this is a form of arbitrage. 
    Speculation without paying funding:
    • Futures contracts don’t pay a funding rate every few hours like perpetual swap contracts do.
    Categories: What is...?

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