A futures contract is an agreement to buy or sell an instrument at a predetermined price at a specific time in the future. A contract can be made on a commodity, currency, stock, digital asset, and many other instruments.
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 later. Futures contracts are derivatives products that are often used to hedge the risk of a customer’s exposure to an underlying asset, and potentially profit from short-term price movements.
With a futures contract, you can open, for example, 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.
Futures contracts can be classified into two forms, classic contracts, and perpetual swap contracts.
- Classic futures: created with a set expiration date when the buyer and the seller will settle the terms of the contract at some pre-determined date in the future. The difference between the future and spot price tends to decrease when approaching the futures expiration date.
- Perpetual futures: there is no expiration date, so traders can hold futures contracts if they like. To link the futures price with the spot price, a funding mechanism is used.
CrossTower supports the trading of perpetual futures on different cryptocurrencies. The trading of perpetual futures may also consist of the use of leverage or called margin trading.