TABLE OF CONTENTS
- What are Crypto Futures?
- How Do Crypto Futures Work?
- Crypto Futures Trading Basics
- Future Contracts Traded at HitBTC
- How to Start Trading Perpetual Crypto Futures
- Closing Thoughts
What are Crypto Futures?
Unlike classic futures that have an expiration date, perpetual futures can be held by traders indefinitely. A funding mechanism helps with linking the price of the contract to the base asset price. The mechanism sets the funding interest rate based on two factors: premium index and interest rate.
Price Is Higher Than the Base Asset Price
If the futures price surpasses the base asset price, traders who entered long positions pay a percentage, while short positions’ traders receive the equivalent of this percentage. This way, traders will sell more and buy less, moving the price to the base asset price.
Price Is Lower Than the Base Asset Price
If the futures price ends up being lower than the base asset price, the opposite happens: traders in short positions are the ones to pay the funding and long positions’ traders get the profit. This way, traders will buy more and sell less, moving the price to the base asset price.
How Do Crypto Futures Work?
When trading crypto futures, it's important to remember that you are not holding the actual cryptocurrency but are only betting on price changes. Let's take a look at this simple example:
Let's say Betty and Dan each invested $60,000 in Bitcoin futures. In this case, Betty holds a long position, while Dan holds a short position. The Bitcoin futures price settled at $68,000 per contract upon expiration. In this situation, Dan will have to pay the exchange the shortfall loss ($68,000-$60,000 = $8,000) because he is in a losing position. Betty, on the other hand, will make $8,000 from the transaction.
Crypto Futures Trading Basics
In the futures market, the leverage is much greater than on the spot market. It, therefore, provides traders with an increased buying power, requiring less collateral than is needed in spot or margin trading. Due to the leverage provided, futures trading is consequently incredibly capital-efficient. To acquire 1 BTC on the spot market, for example, you'll need about $60,000 (depending on market values). With a futures contract, you can open a BTC futures position for a fraction of this cost. This is only achievable if you utilize leverage.
The more leverage you have, the less money you need to invest in a position. Let's assume your Spot account contains only 5,000 USDT. That means that you can only afford to buy 5,000 USDT worth of BTC. With perpetual futures, you can open a position equal to 500,000 USDT of BTC value, with the same 5,000 USDT in your Derivatives account.
With cryptocurrency futures contracts you can open short positions. As a result, you will be able to profit from both rising and declining markets. You can also use futures for hedging and risk management, as well as for leveraging your position. Despite the benefit, however, leveraging and volatility carry certain risks.
To open a futures position, you'll need an initial margin. When using a Derivatives trading account, the initial margin is the percentage of the notional value of a futures position that must be covered by collateral.
The minimum amount required for investors to keep their trading positions open is known as a maintenance margin. When the maintenance margin limit is reached, a trader's position is liquidated.
You may learn more about margin requirements here.
In crypto, perpetual contracts are not settled in the same way as traditional futures contracts. As a result, crypto exchanges need a system that assures that index and futures prices converge on a regular basis. This mechanism is called the "Funding Rate."To calculate the funding rate, the price differential between the spot and futures markets is used. Investors will get or pay funding payments based on open market positions.
Traders may be directly impacted by funding rates. For example, in an overheated bull market, funding rates may rise, making it more expensive for traders to retain long positions.
You can learn more about the Funding Rate here.
Future Contracts Traded at HitBTC
You may find all the futures crypto contracts traded at HitBTC here.
How to Start Trading Perpetual Crypto Futures
On HitBTC, users can buy or sell perpetual futures contracts. Before trading, you should deposit currency on the Derivatives account: open the Account page, press Transfer, select an account to transfer From (Spot or Wallet), and select the Derivatives account in the To drop-down menu. Enter the desired amount of collateral (margin) and press the Transfer button
To open a position, you can open the Derivatives page and make sure you’ve got USDT on your account.
A Few Further Steps You Need to Take
1. Go to the Futures tab, all available contracts are visible in the Contracts widget
2. Assign the currency amount, which will act as the collateral for this contract
3. Create a Long or Short order
4. The newly created contract is now visible in the My orders and trades widget
Futures contracts are settled daily so that your profits or loss is deducted or added to your balance at the end of each day. There is no commission to maintain the futures position, only the fixed taker (0.05%) and maker (0.02%) fees.
The user can place both the margin (on the Margin tab) and futures (on the Futures tab) positions. These are two different markets. Each instrument uses an isolated margin. Isolated Margin mode allows traders to manage their risks. If a trader’s position is liquidated in Isolated Margin mode, instead of their entire margin balance, only the Isolated Margin balance gets liquidated – unlike the Cross Margin mode, where the entire margin balance is shared across open positions to avoid liquidation. Our perpetual futures contracts do not use Cross Margin.
Trading cryptocurrency futures requires specific market behavior knowledge, following news and predictions, and staying self-aware. However, for experienced traders and investors, crypto futures can help balance their portfolio, lower risks, and in the best-case scenario, make a profit. Moreover, crypto futures add liquidity and attract more institutional investors to the market.
Please note, we’re not offering any financial advice. It’s worth researching the topics of cryptocurrency, trading, and investing on your own or reaching out to professional advisors.