A Beginner's Guide to Futures Contract Trading

Futures contract trading is an advanced investment tool within the cryptocurrency space. It allows for the use of leverage, enables both long and short positions, and often features lower transaction fees. These advantages and versatile application scenarios make it popular among many crypto traders and investors. But is it really that straightforward? Using crypto contracts skillfully can lead to significant gains, but misuse can easily result in substantial losses!

This guide will explain the operational rules in detail, covering topics such as how fees are calculated, margin rate computations, adjusting leverage multiples, order types, funding rates, and liquidation events. It will also clarify the differences between various products like perpetual and delivery contracts, as well as USDⓈ-M and COIN-M futures.

Additionally, we will share insights on optimal trading times, the pros and cons of futures trading, and address common questions from beginners seen on platforms like PTT and other community forums.

What Are Futures Contracts? A Brief Introduction

Futures contracts are cryptocurrency derivative financial products offered by exchanges. They feature a diverse range of underlying assets, with each contract's value tied to the price of a specific cryptocurrency. They allow users to open long (buy) or short (sell) positions, providing investors with opportunities to profit whether the market is rising or falling. Moreover, leverage can be used to amplify both gains and losses!

If you are familiar with the concept of traditional futures, understanding this will be easier. Futures contract trading does not involve buying or selling the actual cryptocurrency "asset." Instead, it is purely about trading a "contract"—an agreement between a buyer and a seller. This agreement states that you consent to buy or sell at a specific cryptocurrency price at a predetermined future time, with profits or losses determined by market price fluctuations.

In simple terms, engaging in futures trading on an exchange is a form of "speculation" or betting against another party (your counterparty). The outcome is either you win and they lose, or they win and you lose. The exchange acts as the facilitator, handling settlement and charging transaction fees.

Pros and Cons of Futures Trading vs. Spot Trading

Advantages

• Futures trading typically has high volume and a wide variety of标的物 (underlying assets), providing better liquidity and market depth.
• Transaction fees for futures are generally lower than those for spot trading and are often more competitive than those of many rivals, helping to reduce trading costs.
• Futures offer high leverage, up to 125x on some platforms. When the market moves in your favor, this can lead to considerably higher returns.
• Contracts allow for both long and short positions, enabling profit potential in both rising and falling markets. They can also be used for hedging or arbitrage strategies.
• Futures trading comes with a rich set of features, including multiple order types and advanced functionalities for flexible trading strategies.

Disadvantages

• Futures trading involves numerous rules and specialized terminology, which can be challenging for newcomers to grasp quickly.
• Using leverage amplifies both potential profits and losses, simultaneously increasing the risk of a position being liquidated.
• Whether going long or short, there is always a risk of liquidation if the margin becomes insufficient—a risk not present in spot trading.
• The fee structure for contracts is more complex, and traders must also be aware of additional derivative costs like funding rates or delivery fees.
• Holding contracts does not confer the rights associated with spot assets. For example, they cannot be transferred on a blockchain, used as collateral, earn interest through savings products, or participate in governance.

Note: "Cryptocurrency futures contracts" and "cryptocurrency spot assets" are fundamentally different. Your contract holdings cannot be transferred via blockchain like spot assets, used as collateral to borrow other assets, placed into savings products to earn interest, or used to participate in the governance of specific blockchain projects.

Types of Futures Contracts

Exchanges offer various types of futures contracts. Based on the margin asset type and settlement date, they can be broadly categorized into perpetual contracts, delivery contracts, USDⓈ-M contracts, and COIN-M contracts. The differences are summarized in the table below:

Differences Between USDⓈ-M and COIN-M Contracts

The primary difference between "USDⓈ-M contracts" and "COIN-M contracts" lies in the type of asset used to collateralize and settle the margin. Simply put:

• USDⓈ-M Contracts primarily use stablecoins like USDT as margin and for pricing and settlement. Since USDT is a stablecoin pegged to the US dollar, calculating returns is straightforward. Earning 100 USDT on a contract is equivalent to earning 100 US dollars.
• COIN-M Contracts use cryptocurrencies like BTC or ETH (non-stablecoins) as margin and for pricing and settlement. Therefore, returns for COIN-M contracts must be considered from the perspective of changes in coin quantity. If you profit on a COIN-M BTC contract, your BTC holdings increase, and vice versa.

COIN-M contracts are more suitable for long-term cryptocurrency holders who are typically bullish on a specific coin and focused on accumulating the spot asset. USDⓈ-M contracts are generally better for beginners or average users, as most already hold stablecoin assets like USDT, and calculating contract value and profit/loss is more intuitive.

Differences Between Perpetual and Delivery Contracts

Exchanges offer both "Perpetual Contracts" and "Delivery Contracts." Their key difference lies in the settlement date:

• Delivery Contracts: These have a settlement date (expiry date). Examples include "quarterly contracts" and "next-quarter contracts." They do not have a funding rate but incur a delivery fee upon settlement at expiry, similar to traditional futures.
• Perpetual Contracts: These do not have a settlement date (expiry date). Users don't need to track a delivery date, and as long as the position isn't liquidated, it can be held indefinitely. However, funding fees are settled periodically.

Perpetual contracts are more prevalent on most exchanges than delivery contracts. The main advantage of perpetual contracts is the absence of an expiry date, saving users the hassle of rolling over positions. Additionally, perpetual contracts often allow for higher leverage multiples, giving users greater potential to profit from smaller market moves.

Fee Structure and Calculation Methods

First, understand that the cost of futures trading typically consists of "trading fees" and "derivative fees."

Trading Fees

Trading inevitably incurs fees, whether in spot or futures markets. The trading fees for USDⓈ-M and COIN-M contracts differ slightly and can vary based on account VIP level. Using a standard user account as an example:

• COIN-M Contract Fees: Maker fee is 0.02%, and the Taker fee is 0.05%.
• USDⓈ-M Contract Fees: For USDT contracts, the Maker fee is 0.02%, and the Taker fee is 0.05%. For USDC contracts, the Maker fee is 0.018%, and the Taker fee is 0.045%.

The difference between Maker and Taker fees depends on whether the order is filled immediately. A "market" order executes immediately and incurs the Taker fee. A "limit" order that does not fill immediately qualifies for the Maker fee, but if it fills immediately, it incurs the Taker fee.

Fee rates are subject to change; please refer to the official website for the latest information.

The fee calculation is simple. For buying $100,000 worth of BTC using the Taker rates above, a USDT contract fee would be 50 USDT, while the spot fee would be 100 USDT. Using the Maker rates, the USDT contract fee would be 20 USDT, while the spot fee remains 100 USDT. This clearly demonstrates the cost advantage of contract trading.

Derivative Fees

Derivative fees vary depending on the type of contract traded, as mentioned earlier. Perpetual contracts involve a funding rate, while delivery contracts involve a delivery fee.

A quick explanation: Perpetual contracts, lacking an expiry date, use the funding rate as a balancing mechanism to prevent the contract price from deviating too far from the spot price. This is typically settled every 4 or 8 hours. The funding rate can be positive or negative, determining whether your contract position pays or receives the funding fee.

• Positive Funding Rate: Long positions pay the funding fee to short positions. This discourages further long buying, helping the perpetual contract price converge downward toward the spot price. This often indicates optimistic market sentiment.
• Negative Funding Rate: Short positions pay the funding fee to long positions. This discourages further short selling, helping the perpetual contract price converge upward toward the spot price. This often indicates pessimistic market sentiment.

Perpetual contracts are very popular, so let's use an example. Assume the funding rate is 0.01%, and you hold a long position valued at 10,000 USDT. At the settlement time, this perpetual contract position would need to pay 10,000 × 0.01% = 1 USDT to the short positions.

Delivery contracts, having a settlement date, do not have a funding rate. However, a delivery fee is charged upon contract expiry. Currently, the delivery fee for contracts is the same as the Taker fee rate for that contract.

Margin Rules and Understanding Liquidation

Margin is the foundation of contract trading. First, understand that futures margin modes are divided into "Cross" and "Isolated" types. Beginners are advised to start with Isolated mode, as there are significant differences:

• Isolated Margin Mode: The margin for each contract position is calculated separately and independently. You can add or remove margin specifically for that position. Therefore, if an isolated position is liquidated, only the margin for that specific position is lost, without affecting other contract positions.
• Cross Margin Mode: Allows positions sharing the same margin asset to mutually share margin, including the same asset in your futures wallet. Consequently, if a cross margin position is liquidated, the margin for all cross positions and the same asset in the futures wallet will be liquidated.

In other words, isolated margin is easier for risk management, might lead to liquidation more easily for a single position, but losses are limited to that position's margin. Cross margin positions can share and guarantee margin across different contracts, lowering the risk of liquidation for individual positions. However, if liquidation occurs, it can wipe out the margin from all cross positions and the associated wallet balance!

Liquidation (or forced liquidation) means your margin is gone—vanished, lost, no longer available.

How do you判断 if a contract position might be liquidated? You can directly observe key values provided by the platform: "Maintenance Margin," "Margin Balance," and "Margin Ratio." They are related by a formula:

Margin Ratio = Maintenance Margin ÷ Margin Balance

• Margin Ratio: A lower margin ratio indicates lower risk for the position. When the margin ratio reaches 100%, the position will be liquidated.
• Maintenance Margin: The minimum margin balance required to maintain the position.
• Margin Balance = Wallet Balance + Unrealized P&L. Your position will be liquidated when the Margin Balance ≤ Maintenance Margin.

Let's use an example. If you open an isolated long BTC position with 100 USDT margin and 20x leverage, the position value is 2,000 USDT. Assuming the BTC price is 50,000 USDT, your contract holds 0.04 BTC. In this scenario, if the BTC price drops by approximately 5%, your margin would be liquidated because (50,000 USDT × 0.04 BTC × 5%) roughly equals your initial 100 USDT capital.

Step-by-Step Trading Guide: From Opening to Closing a Position

Step 1: Activate Your Futures Trading Account

If you don't have an exchange account yet, ensure you complete identity verification, activate your futures trading account, and pass any required knowledge tests before proceeding.

Step 2: Transfer Funds

Next, address the issue of contract margin. If you don't know how to deposit funds, please refer to relevant guides first. Once your exchange wallet has assets, use the "Transfer" function to move assets into your "Futures Account." Initially, most users transfer USDT for trading. If you're not ready to risk capital, you can practice using the exchange's futures demo trading feature first. 👉 Explore more strategies for risk-free practice

Step 3: Navigate to the Futures Trading Interface

The location for futures trading is usually prominent. On the web version, it's often in the navigation bar menu; on the mobile app, it's typically in the bottom menu.

Step 4: Explore the Futures Trading Interface

The futures trading interface might seem overwhelming at first glance. It's generally divided into several main functional areas:

• Contract Information: Displays relevant data for the current contract, including the underlying asset, type, price, volume, open interest, etc. Key metrics include the "Mark Price" (used for calculating P&L and liquidation price) and the "Funding Rate."
• Price Chart: The price chart for the contract's underlying asset. It includes various technical indicators and settings. More advanced charting tools, like TradingView, are often available.
• Order Book: Lists all unfilled contract orders, allowing you to observe the bid/ask spread and market depth.
• Order Placement Panel: This is where you open positions. Here you can set the margin mode (Cross/Isolated), leverage multiplier, order type, order details, take-profit/stop-loss levels, etc.

Step 5: Place an Order

If you decide to trade, you need to configure settings in the "Order Placement" area to open a position.

• Margin Mode: Set to Cross or Isolated. The difference was explained earlier. Quickly: Cross shares margin; Isolated does not.
• Leverage Multiplier: The maximum leverage differs per contract (e.g., BTC perpetual might be 125x, ADA perpetual might be 75x). Higher leverage means higher risk. Beginners should start with the lowest leverage, 1x.
• Order Type: Exchanges offer various order types. The most common are "Limit" and "Market" orders. More advanced types like Stop-Limit, Stop-Market, Trailing Stop, and TWAP (Time-Weighted Average Price) can be explored later.
• Order Details: Parameters like price and quantity must be set based on the chosen order type to open a position.
• Advanced Settings: Additional features like take-profit/stop-loss, reduce-only, and time-in-force (e.g., Good-'Til-Canceled GTC) can be configured. While not mandatory, setting take-profit and stop-loss is highly recommended.
• Long/Short: Clicking this button正式下单 (formally places the order). Ensure you choose the correct direction—Long if you believe the price will rise, Short if you believe it will fall.

For example, if BTC is currently priced at 50,000 USDT and your futures account holds 100 USDT:

• Opening a long with 5x leverage gives you a position worth 500 USDT in BTC (0.01 BTC).
• Opening a long with 20x leverage gives you a position worth 2000 USDT in BTC (0.04 BTC).
  Of course, higher leverage means profits and losses are amplified by 5x or 20x!

Most platforms also offer a "Futures Calculator" tool, often found near the order panel. You can use this to estimate potential profit, target price, liquidation price, opening price, and other data before trading.

Step 6: Manage Your Position

After successfully opening a position, you can manage it in the positions section below the chart. Here you can monitor unrealized P&L, liquidation price, margin ratio, add or remove margin, close the position via limit or market order, and adjust take-profit/stop-loss levels.

The margin ratio was discussed earlier. Simply put, if the margin ratio hits 100%, the position is liquidated, and your margin is lost.

Therefore, if you see your position nearing liquidation, you must either close the position early to cut losses or quickly add more margin to prevent liquidation.

Common Use Cases for Futures Contracts

Shorting Opportunities

The ability to short is a major feature of futures trading and is relatively easy to execute. It allows investors to potentially profit in declining markets.

For instance, if BTC's price rallies to $100,000 and analysis suggests it might be a market top, anticipating a future downtrend, one could short a BTC contract. Sell high now, then buy back later at a lower price to close the short position and profit from the downward move.

Amplifying Gains

Futures trading allows for leverage adjustment, up to 125x on some assets, applicable to both long and short positions. If you strongly believe the market will move in a certain direction, using leverage can multiply your returns.

Example: Using 100 USDT to long BTC. If BTC rises from 50,000 to 55,000 (a 10% increase):

• 1x leverage yields a 10% gain = 10 USDT.
• 8x leverage yields an 80% gain = 80 USDT.
  Naturally, losses are also multiplied by the leverage factor. A 10% loss would mean losing 80 USDT with 8x leverage instead of 10 USDT.

Hedging Risk

Futures contracts can also be used for hedging, which is a very useful strategy.

As mentioned, holding contracts doesn't grant spot asset benefits (like staking rewards or governance). If you want to hold spot assets for these benefits but wish to mitigate the risk of price volatility, you can buy spot (go long) and simultaneously sell futures contracts (go short). For example:

• Buy 1 BTC worth of spot assets (Long Spot)
• Sell 1 BTC worth of futures contracts (Short Futures)

Regardless of whether the BTC price rises or falls, the gains and losses from the two positions should roughly offset each other (a strategy known as a "hedge" or "basis trade"). If BTC price rises 20%, the spot gains ~20% while the futures lose ~20%. If BTC falls 30%, the spot loses ~30% while the futures gain ~30%. Actual results need to account for fees, funding rates, and liquidation risks, but this illustrates the hedging concept.

Frequently Asked Questions

What are the main fees associated with futures contracts?
There are always trading fees (Maker/Taker). Depending on the situation, you may also incur derivative fees like the funding rate (for perpetuals), delivery fees (for delivery contracts), and liquidation fees.

What are the typical trading fees for futures contracts?
For standard users trading USDⓈ-M USDT contracts, the Maker fee is usually around 0.02%, and the Taker fee is around 0.05%. Fees can vary based on the contract type and your account VIP level.

What does the Margin Ratio mean?
The Margin Ratio is a key indicator of a position's health and its proximity to liquidation. It represents the ratio of the Maintenance Margin (required to hold the position) to your available Margin Balance. When this ratio hits 100%, the position will be liquidated.

What happens if my futures position gets liquidated?
The margin allocated to that position is lost. This means you lose the capital you used to open that trade, and the position is forcibly closed by the exchange.

Should beginners use Cross or Isolated Margin?
Beginners are strongly advised to use Isolated Margin. It helps contain risk to a single position, preventing a bad trade from automatically draining funds from your entire futures wallet or other positions. Cross Margin should be used with caution and full understanding.

What is a funding rate, and how does it work?
The funding rate is a fee exchanged periodically (e.g., every 8 hours) between long and short traders in perpetual swap markets. It ensures the perpetual contract price stays close to the underlying spot price. A positive rate means longs pay shorts; a negative rate means shorts pay longs.

Disclaimer: Cryptocurrency investments carry extremely high risks. This article is solely for informational purposes and is not intended as investment advice or solicitation. Users should consider whether any opinions, views, or conclusions presented here suit their specific circumstances. Invest at your own risk.