Futures trading

Futures trading is a form of derivatives trading. You open a contract whose value follows the price of an asset such as BTC or ETH, and your profit or loss depends on how that price moves. You never receive the coin itself. That is the main difference from spot trading, where you buy and own the asset immediately.

Crypto exchanges made futures popular for two reasons: you can go short as easily as long, and you can use leverage to open a position larger than your deposit. Both features make futures useful for hedging and speculation, and both make losses arrive faster.

How it works

You deposit collateral, called margin, into a futures account. When you open a position, the exchange locks part of that margin (initial margin) and requires you to keep a minimum level (maintenance margin). With 10x leverage, $1,000 of margin controls a $10,000 position, so a 1% price move changes your balance by about 10%.

The exchange values open positions using a mark price, usually built from an index of prices on several spot markets, so that a single spike on one venue does not trigger losses unfairly. If losses push your margin below the maintenance level, the position is liquidated: the exchange closes it and you lose most or all of the margin assigned to it. Exchanges use an insurance fund, and in extreme cases auto-deleveraging, to cover positions that close at a loss beyond the trader's margin.

Most platforms offer two margin modes:

• Isolated margin: each position has its own margin, so a liquidation only takes what you assigned to that trade.
• Cross margin: all positions share the account balance, which delays liquidation but can wipe out the whole balance.

Types of crypto futures

Perpetual contracts use a funding rate. At set intervals, often every 8 hours and on some markets every 1 or 4 hours, traders on one side pay those on the other. When the contract trades above spot, longs pay shorts, and the reverse when it trades below. Funding can earn you money or cost you money, and over weeks it can matter more than trading fees.

Why traders use futures

• Shorting: profit from falling prices without borrowing coins.
• Hedging: a holder of BTC can open a short to protect against a drop without selling.
• Capital efficiency: leverage frees up capital, although it raises risk at the same rate.
• Basis and funding trades: buying spot and shorting the perpetual can capture funding payments with limited price exposure.

Limits and risks

Leverage is the main risk. At 20x, a move of about 5% against you can liquidate the position, and crypto often moves that much in a day. Some exchanges offer 100x or more, where a price move under 1% is enough. Liquidations can also cascade during sharp moves, causing wicks that close positions which would otherwise have survived.

Other costs add up: maker and taker fees on both opening and closing, funding payments on perpetuals, and slippage on thin markets. Access also depends on where you live. Many regulators limit leveraged crypto derivatives for retail clients, for example the UK bans their sale to retail consumers, and offshore exchanges often block users from the US and other restricted countries. Trading through a VPN to bypass these rules usually breaks the exchange's terms and can lead to frozen funds.

What to check when comparing exchanges

• Contract range: USDT-M, USDC-M, coin-margined, delivery contracts, and which coins are listed.
• Maximum leverage and limits: leverage often drops as position size grows.
• Fees and funding: maker/taker rates, VIP tiers, funding interval and history.
• Liquidity: order book depth and open interest on the pairs you trade.
• Risk tools: isolated and cross margin, stop-loss and take-profit orders, mark price transparency, insurance fund size.
• Practice and automation: demo trading, copy trading, futures trading bots and API access.
• Licensing: whether futures are legally offered to residents of your country.

Futures vs options: a futures position gains and loses in line with price, while options give the right, not the obligation, to buy or sell, so a buyer's loss is capped at the premium paid.