Futures Trading Basics

What is a Futures Contract

A futures contract is an agreement to buy or sell an asset at a specific price at a specific future date. In traditional finance, futures for agricultural products, crude oil, gold, and other commodities have been traded for a long time. In cryptocurrency, Bitcoin futures rapidly grew after being listed on the CME in 2017.

There are two types of cryptocurrency futures.

This article covers fundamental concepts applicable to both types. The unique structure of perpetual futures is explained separately in the next article.

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Long and Short Positions

Long - Betting on Price Increase

Opening a long position when BTC is $100,000 means you profit as price rises.

• BTC $100,000 to $105,000 (+5%): Profit
• BTC $100,000 to $95,000 (-5%): Loss

The direction is the same as spot buying, but the difference is you can use leverage.

Short - Betting on Price Decrease

Opening a short position when BTC is $100,000 means you profit as price falls.

• BTC $100,000 to $95,000 (-5%): Profit
• BTC $100,000 to $105,000 (+5%): Loss

This is a way to invest in declines that's impossible with spot.

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Margin

Concept

Margin is the collateral deposited to open a position. In futures trading, you don't need the full contract value. You only need to deposit a portion as margin.

For example, to open a $100,000 BTC futures position:

• 10x leverage: $10,000 margin required
• 20x leverage: $5,000 margin required
• 50x leverage: $2,000 margin required

Initial Margin

The minimum margin required to first open a position.

Initial Margin = Position Size / Leverage Multiplier

10x leverage on a $100,000 position requires $10,000 initial margin.

Maintenance Margin

The minimum margin required to maintain a position. If losses cause remaining margin to fall below maintenance margin, forced liquidation occurs.

Maintenance margin rates vary by exchange and position size but are typically around half of initial margin.

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Leverage

How It Works

Leverage is the multiplier of position size relative to margin. 10x leverage means operating a position 10 times the size of your margin.

Leverage and P&L

Opening a BTC long position with $10,000 margin:

At 20x leverage, a 5% BTC decline wipes out your entire margin. At 50x, just 2% adverse movement leads to liquidation.

Appropriate Leverage

Cryptocurrency daily volatility commonly reaches 3-10%. Considering this volatility:

• 1-3x: Conservative. Suitable for longer-term positions
• 5-10x: Moderate. For experienced traders
• 20x+: Aggressive. Only for very short timeframes
• 50x+: Extreme. Not recommended except for quick scalping

Higher leverage means greater profit potential, but the buffer before liquidation shrinks dramatically. Most professional traders use leverage of 5x or less.

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Margin Modes

Cross Margin

Your entire account balance is used as margin for the position.

• Advantage: Larger buffer before liquidation. Entire balance acts as cushion
• Disadvantage: Liquidation can wipe out entire account balance

Isolated Margin

Only the margin allocated to the position is used for that position.

• Advantage: Maximum loss is limited to allocated margin
• Disadvantage: Smaller buffer before liquidation. May be liquidated by temporary swings

Which Mode to Choose

Isolated margin is safer for beginners. Even if one position is liquidated, remaining funds are protected.

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Profit and Loss Calculation (PnL)

Unrealized PnL

Profit/loss while position is still open.

Long Position:

Unrealized PnL = (Current Price - Entry Price) x Quantity

Short Position:

Unrealized PnL = (Entry Price - Current Price) x Quantity

Realized PnL

Profit/loss confirmed when position is closed. Final realized PnL is after deducting trading fees and funding fees.

ROE (Return on Equity)

Return relative to margin. Reflects leverage effect.

ROE = (PnL / Margin) x 100%

10x leverage with $10,000 margin, price rises 3%:

• PnL = $100,000 x 3% = $3,000
• ROE = $3,000 / $10,000 x 100% = 30%

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Settlement Types

USDT Margined (Linear)

Uses USDT (stablecoin) as margin, with P&L settled in USDT. Intuitive and easy to understand, making it the most commonly used method.

Coin Margined (Inverse)

Uses the underlying asset itself (BTC, ETH, etc.) as margin. When price rises, profits are settled in BTC creating a double-gain effect, but declines cause double losses.

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Order Types

Market Order

Executes immediately at current market price. Used for quickly opening or closing positions, but slippage (execution at worse-than-expected price) may occur.

Limit Order

Specifies a desired price for the order. Executes when price is reached, often with better fee rates than market orders.

Stop-Loss / Take-Profit Orders

Pre-set stop-loss and take-profit prices when opening a position. Essential tools for risk management.

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Summary

Futures trading involves depositing margin and using leverage to invest in underlying asset price movements. Bi-directional (long/short) trading is possible, and leverage increases capital efficiency, but liquidation risk increases proportionally. Limit risk with isolated margin, use appropriate leverage, and always set stop-losses - these are the basics of futures trading.

Next article: Perpetual Futures Contracts - The Secret of Futures Without Expiration