Crypto futures are contracts that represent the value of a specific cryptocurrency. When you buy a futures contract, you do not possess the underlying cryptocurrency. Instead, you own a contract under which you have consented to buy or sell a particular cryptocurrency at a later date.

With a futures contract, you can open a 1 BTC futures position at a portion of its market value. Futures contracts allow users to profit from short-term price movements in either direction. They also enable users to hedge currency risks without having to hold the underlying futures asset.

The futures price is based on the prevailing spot price (non-futures market price) plus the futures premium. The futures premium could be either positive or negative. A positive premium shows that the futures price is higher than the spot price; on the other hand, a negative premium indicates that the futures price is lower than the spot price. Changes in supply and demand may cause the future premium to fluctuate.

Position – a futures contract, created by a user (this is an equivalent of a spot market order).

Long position – a position against the market, where the profit is derived when the asset's price goes up.
Opening a long position entails the purchase of an asset for subsequent resale at a higher price.

Short position – a position with the market, where the profit is derived when the asset's price goes down.
Opening a short position entails a sale of an asset for subsequent repurchase at a lower price.

Classic and perpetual futures difference

Futures trading is carried out on different markets, so the futures market price often differs from the base asset price on the spot market. This difference is the premium index (basis).

• Classic futures: the basis tends to zero when approaching the futures expiration date. When the price deviates from the fair price, arbitrage opportunities appear and the price is thereby kept close to the fair price.
• Perpetual futures: there is no expiration date, so traders can hold futures contracts as long as they like. To link the futures price with the base asset price, a funding mechanism is used.

The essence of the mechanism of the perpetual futures is to set the funding rate interest, which depends on the premium index (basis) and interest rate (the difference between the rates of the base and quoted currencies - usually fixed and small). The funding rate is charged from positions that increase the basis, and is paid to positions that decrease the basis:

• If futures price > base active price, the funding rate is automatically set so that traders in long positions pay a certain percentage, and traders in short positions receive the same percentage. This mechanism motivates traders to close, or at least open long positions less often, thereby preventing the futures price from rising more. At the same time, it motivates traders to open or not close short positions, to make some low-profit or make slightly unprofitable short positions profitable since the fundings cover these losses. In total, the futures price gradually returns to the spot price.
• If the futures price < base asset price, traders in short positions pay funding, and traders in long positions receive it. It motivates traders to buy more and sell less, which moves futures price to the base asset price.

Futures market trading

Before trading

Before trading, a user should put the currency on the Derivatives account.

1. Open the Account page.

2. Press Transfer option in the required currency line (or clicks the "3 dots" button and then Transfer).

3. A pop-up will appear. 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.

Trading

1. Go to the Futures tab.

All available contracts are visible in the Contracts widget.

2. You will need to assign the currency amount, which will act as the collateral for this contract.

For example, you need an ETH/USDT contract. Click the Margin button on the top:

Fill in the fields on the Add margin tab:

• Amount – the currency amount, that will be used as collateral.
• Leverage (x1-x100) –  the ratio of the trader's own funds to the funds required to open a position. Leverage is provided by the exchange and allows the trader to perform trades, the volume of which significantly exceeds the size of the client's own funds.

Press Transfer next. Please note that you can select another account:

3. Create a Long or Short order (as Buy or Sell order in the spot terminal):

4. The newly created contract is now visible in the My orders and trades widget.
The Show all contracts checkbox can be used to make all contracts (for all currency pairs) visible, provided that the checkbox is activated. You can change the contract Leverage after its creation by clicking the Margin button in the position line:

5. The list of completed trades is located on My trades tab.

Liquidation

If the currency pair price on the market (Mark Price) will be the same as Liq. Price for a certain contract, this contract will be liquidated.

An attempt will be made to close the contract at the current market price:

• Part of the margin collateral will be used to cover the loss.
• If there is a surplus of the margin collateral, it will be returned to the user.
• If the loss cannot be covered by margin collateral, the position will be given to Insurance Fund (internal platform mechanism).
• If the Insurance Fund is unable to process the position, the ADL mechanism can be applied to the opposite market side.

The liquidation mechanism also takes potential funding and penalties into account. So, if the Funding Rate has increased, and a high Leverage is used, when the user does not have enough collateral to deduct funding, the position can also be liquidated. Upon liquidation, a certain amount of penalty is debited from the user.

To avoid liquidation, the user can either close the contract before the liquidation occurs or increase the margin collateral for this contract: