What are crypto futures contracts?
A crypto futures contract is an agreement between a buyer and a seller that represents opposite views on the future value of a cryptocurrency. Kraken Futures offers contracts on over 40 different cryptocurrencies.
A buyer profits if a contract’s underlying asset (such as BTC, ETH or another cryptocurrency) increases in price, while a seller profits if it declines.
In a spot market, an asset is bought and sold at current market prices. Traders exchange one asset, like USDT, for another asset, like BTC.
In Kraken Futures, a contract’s underlying asset is never held by the buyer or seller. Because each trader took the opposite side of a trade based on which way a cryptocurrency’s price would move, one trader’s loss is the other trader’s gain.
The crypto futures market is a significant part of the global cryptocurrency economy and is growing as more institutional investors get involved. Overall, crypto derivatives’ volumes regularly account for more than half of all crypto trading, which equates to billions of dollars of value transferred each day.
You can find out more about Kraken Futures here.
Crypto futures trading fundamentals
Kraken Futures matches the buyer with the seller of each futures contract, meaning Kraken Futures is not a counterparty to any trade.
When a trader buys a futures contract, he or she profits when the contract’s price rises (which happens when the underlying cryptoasset’s price rises).
When a trader sells a futures contract, he or she profits when the contract's price falls (which happens when the underlying cryptoasset’s price falls).
Exchanges require collateral margin (crypto, cash or stablecoin) to open a futures position. If the market price of an asset drops far enough that the assets held as collateral are not sufficient to cover a trader's open position, it can be liquidated by the exchange.
Futures trading is a zero sum game, meaning one party must incur losses for the other to realize gains. Because a futures contract is an agreement directly between traders, both buyer and seller need to agree upon the details of the contract before it is brokered.
There are three components of a crypto futures contract:
- Expiration date
This is the date on which a contract will be executed at the previously agreed upon price. Kraken Futures also offers perpetual contracts that have no expiration date. Perpetual futures have a built in funding rate which is updated every four hours in order to keep the price of the contract aligned with the spot price of its underlying cryptoasset.
For example, if there is larger volume demand for long bitcoin perpetuals than short bitcoin perpetuals in the current market, the contract price will trade above the current spot market price of bitcoin. To dissuade new long traders from entering the market and increasing this price discrepancy, the funding rate system will require long traders to pay a fee to short traders at fixed intervals based on the size of their open positions until the contract’s pricing aligns with bitcoin’s spot market pricing.
- Contract lot size
This defines the amount of the underlying asset that a futures contract represents. A single contract can be priced in terms of its underlying asset (1 contract = 1 BTC) or a currency (1 contract = $1 worth of BTC).
When contracts are priced in terms of the underlying asset, fractional trading is available on Kraken. For example, even though a contract’s unit size is 1 BTC, a trader can buy or sell a lot size as small as .0001 BTC.
Depending on the asset and amount traded, different leverage (or margin) rates apply. You can find Kraken Futures’ margin schedule here. With up to 50x leverage, you can enter into a position with just 2% (1/50) of the contract’s actual value (also known as its notional value).
What are the advantages of crypto futures trading?
Despite their complexity, futures offer a variety of benefits over the spot market that some traders may need, depending on their expertise in the markets, trading strategies and risk appetite.
- Speculation: Futures allow traders to speculate on the future prices of specific cryptoassets and take advantage of price swings in either direction. Opening a short position on a futures contract is one of the easiest ways to profit as its underlying cryptoasset’s price falls.
- No asset ownership: Futures are a financial contract that provide exposure to cryptoasset prices without having to take ownership of the cryptoasset itself. Traders can buy a contract and recognize their profit without ever having owned, transacted or custodied the underlying cryptocurrency.
- Fees: Futures trading fees are generally much lower than spot trading fees. Kraken Futures offers one the most competitive fee structures in the crypto futures market, with fees as low as 0.01%.
- Leverage: Futures allow traders to use leverage. This is built into the contract and allows for more capital-efficient trading while also ensuring an account balance does not go negative. Leverage positions can be liquidated – see our liquidation FAQ here.
- Hedging: If you own a cryptoasset, you can enter into a short futures position which reduces your exposure to (or “hedges” against) falling prices. This can be an effective strategy to protect a cryptoasset against downward price movement without having to sell the asset itself.
- Arbitrage opportunities: Futures allow you to capitalize on crypto market inefficiencies. There may be instances when you can lock in profits by going short on a futures contract while going long on the underlying cryptoasset in the spot market.
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Summary of crypto futures contracts
- Crypto futures contracts allow traders to gain exposure to the price movement of a cryptocurrency without having to custody the asset itself.
- Futures trading makes up a large portion of the cryptocurrency market's trading volume.
- The futures market provides several benefits over the spot market including lower fees, access to borrowed funds and the ability to more effectively hedge existing positions.