A Futures contract is a legally binding agreement between two parties to buy or sell a specific cryptocurrency at a predetermined price on a specific date in the future.
The contract specifies the quantity of the asset that will be exchanged, as well as the settlement date and price.
Most crypto Futures products listed on centralized exchanges like Binance Futures and Bybit have Perpetual contracts that do not have an expiry date but introduce the concept of Funding fee to make up for it.
Another way to make money on Futures trading is to dabble in contracts with expiry dates ranging from Monthly to Quarterly expiries.
The way these contracts work is similar to the ones used in regular financial markets and can provide an excellent jumping-off point if you are looking to get a flavour of the crypto markets.
This article takes you through what happens when a crypto Futures contract expires.
What Happens When The Crypto Futures Contracts Expire?
When a crypto Futures contract expires, the holder must either take delivery of the underlying asset or settle the contract by paying or receiving the difference between the contract’s settlement price and the price at which they entered the contract.
This is known as the “settlement process.”
For example, suppose the holder of a Bitcoin Futures contract enters into a contract to buy one Bitcoin at a price of $10,000, and the price of Bitcoin at expiration is $12,000.
The holder must pay the difference of $2,000 to the counterparty. On the other hand, if the price of Bitcoin at expiration is $8,000, the counterparty would owe the holder $2,000.
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- Physically settled
There are several different types of crypto Futures contracts, including physical delivery contracts and cash-settled contracts.
Physical delivery contracts require the holder to take delivery of the underlying asset, while cash-settled contracts are settled in cash.
- Cash settled
In practice, most Futures contracts are settled in cash rather than through the physical delivery of the underlying asset.
This means that the holder and counterparty will simply pay or receive the cash difference between the contract price and the settlement price.
Some traders also allow their positions to expire, which in the case of Bitcoin Futures on CME defaults to cash settlement according to the BRR (Bitcoin Reference Rate).
In case the participants wish to extend their contracts beyond the expiration date, it is called rolling forward a Futures contract.
The expiration of a Futures contract does not affect the underlying asset itself. The asset will continue to exist and can be bought or sold on other markets even after the Futures contract has expired.
When Are Bitcoin Futures Settled?
Every exchange has its own rules for deciding the expiry date for its Futures contracts. As explained above, Perpetual contracts do not have any expiry date.
When it comes to CME, all contracts expire on the last Friday of each month by 4 pm London time. These contracts are then settled in cash on a Monday that falls before the expiry date.
On Bakkt, the contracts are settled in BTC instead of in USD. The expiry date is the third Thursday of the month, and settlement is on the next trading day.
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Variety Of Crypto Futures Contracts
For the expiry dates on the contracts, crypto Futures contracts can be broadly divided into Perpetual, Quarterly, and Monthly contracts.
- Perpetual Futures contracts
Most of the volume for Bitcoin and other cryptocurrencies lies in the contracts that do not have an expiry date and are called Perpetual Futures contracts for that reason.
These contracts are supported by major crypto exchanges and introduce the concept of funding fees to help the Futures and spot prices converge.
When the funding fee is negative, it means that the spot price is higher than the price of a Futures contract.
That’s why traders holding shorts will pay the ones holding long positions when the funding countdown ends to incentivize the convergence of prices.
When the fee is positive, the spot price is lower than that of a Futures contract, and here traders holding short positions are paid by the ones holding the long positions at the end of the funding countdown.
- Quarterly Futures contracts
Most large crypto exchanges like Binance and Bybit have contracts that expire at the end of every financial quarter.
As of December, these exchanges have quarterly expiring contracts for both Bitcoin and Ethereum for the date of 31st March.
These contracts are also available on popular Futures exchanges like the Chicago Mercantile Exchange and Bakkt. The obvious question that comes to mind is whether the price of Bitcoin is affected by the expiry of these contracts.
It has been noted historically that the day before the settlement occurs, there is a 2% movement of the asset from the median and average values. Most participants credit this to the large investors or ‘whales’
- Monthly Futures contracts
If you are looking for contracts that have quicker expiries, you might want to turn your gaze toward the Chicago Mercantile Exchange, which has expiries for the two nearest December months as well as the next six consecutive months.
Because of this, traders that participate in the market can use these contracts to try out different trading strategies.
These contracts allow you to be flexible and work according to the time horizons you have analyzed for your asset.
You can use crypto Futures to hedge your risk or speculate on the price movement of a cryptocurrency.
For example, if you believe the price of Bitcoin will rise, you can buy a Futures contract that allows you to buy Bitcoin at a lower price in the future.
If the price of Bitcoin does indeed rise, the trader can then sell the Futures contract for a profit.
On the other hand, if a trader believes the price of Bitcoin is going to fall, they can sell a Futures contract, betting that they will be able to buy Bitcoin at a lower price in the future.
If the price of Bitcoin does indeed fall, the trader can repurchase the Futures contract at a lower price, resulting in a profit.
Conclusion
Crypto Futures are a relatively new market and have seen significant growth in recent years.
However, they are also a highly volatile market and involve a high degree of risk. It’s important for traders to understand the risks and do their research before entering into a Futures contract.
Crypto Futures are traded on specialized exchanges, which act as intermediaries between buyers and sellers.
These exchanges provide a platform for traders to buy and sell Futures contracts and also set the rules and regulations for the market.
It is recommended to start with small positions and low leverage when entering the world of crypto Futures. As you learn, both your portfolio and your market analysis will see a lot of growth.
