Futures contracts in both the traditional and crypto markets allow participants to gain leveraged exposure to an asset without actually owning any of it
So if you have decided to get into Crypto Futures trading or are just looking to dabble in the space, you will need to know the different types of Futures contracts.
This article will inform you about Perpetual and Quarterly Futures contracts apart from their obvious difference in their expiry dates.
By the end of this, you will also understand which of these derivatives contracts best fits your trading needs.
Crypto Futures Contracts
Just to give you a quick refresher on what Futures contracts are and what they entail, you get an obligation to buy the underlying asset at the predetermined price at a future date.
These contracts are used by traders to take a bet on which way the asset’s price will move and profit if their bet is correct.
Other than being able to speculate on asset prices, Futures contracts also allow you to hedge your spot positions with a Futures contract in the opposite direction so you can offset your losses if they do happen.
Leverage trading allows you to buy a contract without having to put up the complete value of your asset and essentially take a position 125x the size of your invested capital.
If you use contracts that are settled in cash, once you are happy with the amount of profit you have made, you can return the borrowed funds and keep the capital and the profit.
Binance Futures Quarterly Vs Perpetuals
- Perpetual Futures Contracts
A perpetual Futures contract does not have any expiration date, which is the biggest difference between these and quarterly Futures contracts.
As a trader, you will not need to keep an eye on when your contract is expiring hence allowing you to form long-term strategies in Futures trading as well.
There is no concept of Perpetual Futures contracts in the regular financial markets. This brings with it some amount of novelty as well as the need to formulate new trading strategies to take advantage of not having any expiry dates.
Also, perpetual contract traders never have to worry about whether they want to ‘roll over’ a position from one expiry to the next.
This is obviously because these kinds of contracts have no expiry themselves and can be held for perpetuity, as the name suggests. The only thing to be done is to keep paying the funding fee as calculated by the exchange.
This fee is paid periodically by traders on one side to one on the other side, and the exchange does not take a cut.
When the funding fee is positive, the traders in long positions pay the traders holding the short positions.
On the other hand, when the funding fee is negative, the traders in short positions pay the ones holding the long positions.
In the case when the market is extremely bearish or bullish, the price difference between spot and Futures can increase quite a bit, which in turn would increase the magnitude of the funding fee.
If you are planning to hold your position for a long period of time, it can simply be very costly just to hold it.
For short-term positions, the funding fee is not a significant cost.
Take an example where you buy 1 Ethereum Perpetual Futures contract for $1,200.
You do not have to worry about an expiry date to settle the contract, but you will be paying a funding fee depending on whether the rate is positive or negative.
When the price reaches your target, you can sell the contract and get back your initial capital as well as the profit.
You will have to factor in the Funding fee paid to hold your position when you are making your PnL calculations.
So, if you close your position when the price of 1 Ethereum reaches $2,000, you will be able to make $800 in profit without factoring in your Funding fee payments.
- Quarterly Futures Contracts
Amongst the Futures contracts that have an expiry date, quarterly Futures are the most popular. They expire on the last Friday of each quarter.
Depending on the contract you have chosen to trade, you will either receive the cash equivalent of your profit or loss when you close the position.
But if it is a deliverable contract, you will need to buy the predetermined amount of Bitcoin at the predetermined price.
Due to a combination of arbitrage trading and the laws of demand and supply, the price of the contract will be close to the spot price as the expiry date approaches.
You can also close your position before the expiry if the price has reached your Take Profit target. In this case, your PnL would be calculated as the difference between your entry price and the price at which you closed it.
As a simple example, you bought the BTCUSDT Futures contract on Binance with an expiry of 033122 (31st March 2022) at a price of $17,200.
The price of Bitcoin futures contract will move between now and then. As per our example, the price of 1 Bitcoin on 31st March 2022 is $25,000, and the contract will need to be settled.
Your Futures contract will then allow you to buy 1 Bitcoin at $17,200, which you can sell at the current market price and pocket the $7,800 as profit.
In case the price of your asset has not reached your desired level by the time of expiry, there is an option to roll over your contract to the next expiry.
Both Perpetual and Quarterly Futures contracts give traders the ability to gain exposure to a volatile cryptocurrency market without having to own the underlying asset itself.
Also, the use of leverage allows good traders to multiply their profits quickly.
Futures contracts also help traders diversify their portfolios and use these positions as hedges to conventional markets.
Either way, before you start trading Futures, you should look to understand the pros and cons, as well as the risks involved in both Perpetual and Quarterly Futures contracts.