Introduction to Crypto Futures

Introduction to Crypto Futures

A crypto futures contract is an agreement to buy or sell a cryptocurrency at a fixed price on a future date. Instead of holding the coins directly, you are trading contracts that follow the coin’s price.

The concept comes from traditional markets where farmers and merchants locked in prices for crops to reduce uncertainty. In crypto, the purpose is the same: futures help traders manage risk, speculate on price movements, and take advantage of differences between markets.

How a Crypto Futures Contract Works

Every futures contract defines the terms of the trade. The key features are:

Underlying asset and contract size

The contract is linked to a specific cryptocurrency such as Bitcoin or Ethereum. The contract size tells you how much of the asset each contract represents. Some contracts represent whole coins, while others represent fractions, making them accessible to a wide range of traders.

Settlement

Futures can be settled in two ways. Physical settlement means the underlying crypto is delivered when the contract expires. Cash settlement is more common and means profits and losses are paid out in cash or collateral without anyone exchanging coins.

Expiration

Dated futures expire on a set date. When that happens, the contract price converges with the spot price and the contract settles. Perpetual futures, which are the most popular in crypto, never expire. Instead, they rely on funding payments between long and short traders to stay close to spot prices.

Notional value

The notional value is the total value of the position. If one contract equals one Bitcoin and Bitcoin trades at 30,000 dollars, then the notional value is 30,000 dollars. This number helps measure the size of exposure relative to account balance.

Tick size and profit or loss

Each futures contract has a minimum price movement called a tick. For example, if the tick size is 5 dollars and the contract size is one Bitcoin, then each tick equals 5 dollars.

If the contract moves by 1,000 dollars, that equals 200 ticks, or 1,000 dollars of profit or loss per contract. Because contracts are often traded with leverage, even small price changes can lead to significant gains or losses.

Managing Expiry

When dated contracts near expiry, traders have choices. They can close the position by taking the opposite trade. For example, closing a long position by selling the same contract.

They can roll the position into a later contract to keep exposure. Or they can let the contract expire and settle. Most traders choose to close or roll before expiry to avoid final settlement.

Why Trade Crypto Futures?

Crypto futures are used for hedging, speculation, and arbitrage.

Hedging means reducing risk. A trader holding Bitcoin who fears a drop in price can short futures. If the price falls, the loss on Bitcoin is offset by the gain on the futures position.

Speculation means betting on direction. If a trader expects prices to rise, they buy futures. If they expect prices to fall, they sell futures. Because of leverage, profits can be magnified, but losses can grow just as quickly.

Arbitrage means taking advantage of price gaps. If a futures contract trades at a higher price than spot, a trader can sell the futures and buy the asset in the spot market, capturing the difference when prices converge.

The Bottom Line

Crypto futures expand what is possible for traders. They provide tools to hedge holdings, speculate on both rises and declines, and profit from market inefficiencies. But they also come with high risk. Leverage and contract mechanics can turn small moves into large losses if not managed carefully.

The key is to understand how contracts work, measure risk before trading, and use futures as part of a broader strategy rather than chasing fast profits.