What Are Crypto Futures & How Does It Work

Two hands shaking over an agreement and contract

In recent years, the world of cryptocurrencies has witnessed tremendous growth and innovation, captivating the attention of investors and traders worldwide. Among the various avenues of trading in the crypto market, futures trading has emerged as one of the most popular options. 


In this guide, we detail the basics of cryptocurrency futures, how futures in crypto work, and more. Whether you aim to capitalize on short-term price fluctuations or hedge your existing crypto holdings, understanding the fundamentals of crypto futures trading is essential. By gaining insights into this exciting market, you can make informed decisions and take your trading to the next level.


What Are Crypto Futures

Crypto futures are a type of derivative trading product that allows two parties to agree to buy or sell a cryptocurrency at a specified price at some point in the future. Crypto futures contracts have many of the same features as traditional futures contracts, but with some key differences. Crypto futures contracts are often settled in cash, rather than in the underlying asset. In the case of Ethereum futures, the underlying asset would be Ethereum. Crypto futures also tend to have shorter durations than traditional futures contracts. 


The prices of crypto futures closely track the price of the underlying asset. However, other factors such as the maturation date of the contract (especially close to its settlement date) and fundamental catalysts (a major country adopting crypto) may also affect the prices of crypto futures. Traders tend to use crypto futures to hedge against price movements in the underlying asset, or to speculate on the future price of the asset. 


How Futures In Crypto Work

Crypto futures work by allowing investors to speculate on the future price of a cryptocurrency. For example, let’s say that you believe that the price of Bitcoin will increase in the future. You can open a crypto futures contract that allows you to buy Bitcoin at a set price at some point in the future. 


If the price of Bitcoin does increase, you will be able to buy it at a discounted rate and then sell it for a profit. However, if the price of Bitcoin falls, you will still be obligated to buy it at the agreed-upon price, potentially leading to a loss. Crypto futures can be a risky investment, but they can also lead to big profits if used and timed correctly.


There are three main things that you need to pay attention to when it comes to buying and selling cryptocurrency futures contracts.


  1. Expiration/Settlement date
  • This is the date when the futures contract must be settled. While traders can buy and sell these contracts before the settlement date, the settlement date serves as a line in the sand for the date that the transaction has to be settled.


  1. Units per contract
  • This details how much each crypto futures contract is worth of the underlying asset. The units per contract differ from platform to platform. For example, one Bitcoin futures contract on Deribit equals 10 US dollars worth of Bitcoin while one Bitcoin futures contract on CME equals 5 Bitcoin.


  1. Leverage
  • Traders can use leverage to increase their speculation and trading size on futures contracts. The amount of leverage afforded to traders depends on the platform. 


How Long Can You Hold Crypto Futures

Crypto futures contracts have expiration dates, which determine the length of time you can hold the contract. These expiration dates range from a few days to several months or even longer, depending on the contract type and the cryptocurrency being traded. 


It’s important to note that as the contract approaches its expiration date, traders have the option to either close their positions or roll them over into new contracts with later expiration dates if they wish to extend their holding period. However, it’s crucial to closely monitor the contract expiration dates and manage your positions accordingly to avoid any unwanted liquidations or contract settlements.


What Is An Example Of Futures In Crypto

To illustrate how crypto futures work, let’s use an example.


Bob, an experienced trader, believes that the price of Bitcoin (BTC) will increase in the future. He decides to take a long position in BTC futures contracts to potentially profit from this anticipated price rise. 


Assuming the current price of BTC is $35,000, and Bob expects it to reach $40,000 within the next month so he opens a BTC futures contract. The contract specifies that he will buy one BTC at the agreed-upon price of $35,000, with an expiration date one month from the trade initiation.


Let’s say that the margin requirement for Bitcoin futures trading at the trading platform that Bob is trading at is 50% of the contract amount, he has to deposit $17,500 as margin and finance the rest of the contract purchase by using leverage if he so chooses.


Assuming that Bitcoin’s price reaches his target price of $40,000 and Bob sold his BTC futures contract at that market price.


Since Bob bought the contract at $35,000 and sold it at $40,000, he will make a profit of $5,000 per BTC futures contract. 


On the other hand, if the price of BTC had declined to $30,000 instead of rising, Bob would have faced a loss. In this case, he could choose to either close the position and accept the loss or wait until the contract expiration date in the hope that the price might rebound.


Advantages Of Cryptocurrency Futures

Crypto futures have become increasingly popular in recent years due to the many advantages they offer traders. 


Crypto futures contracts allow traders to bet on the future price of a cryptocurrency, without having actually to purchase the underlying asset. This allows traders to speculate on the future price movements of a cryptocurrency without incurring the high costs associated with buying and holding the asset itself. 


Crypto futures also offer greater flexibility than traditional futures contracts, as they can be traded on a variety of different exchanges and platforms. 


In addition, crypto futures offer increased liquidity and higher leverage ratios than most other types of derivatives. The higher leverage that crypto futures offer means that traders can control larger positions with a smaller amount of capital, potentially magnifying profits.


How Risky Is Crypto Futures

Crypto futures trading can allow you to leverage your returns but the leverage also applies to the downside. The key is to make sure that you educate yourself and trade carefully, knowing the risk and what you can afford to lose.


Where To Trade Crypto Futures

With a focus on crypto futures, Flipster is the go-to platform for users to trade crypto futures. The platform offers a simplified way to see all your crypto assets, the top crypto movers each day, over 180+ tokens, zero trading fees, and more. Download the Flipster app and experience all the features today!