1. What are Bitcoin Futures?
Bitcoin futures, also known as Bitcoin contracts, are very different from cryptocurrency transactions that require physical ownership of digital currencies.
Bitcoin contracts enable you to predict Bitcoin’s price movements and hedge risk. This type of trading means that you are investing in the price trend rather than the asset itself.
In the spot market, traders can only profit from buying low and selling high on a specific undertake; In the futures (contract) market, you can profit from two-way market fluctuations by going long or short on an underlying.
- Long: Buy a contract with the expectation that the price of the contract will rise
- Short: Sell a contract with the expectation that the price of the contract will fall
2. Types of Bitcoin contracts
At present, there are two types of Bitcoin contracts, one is a delivery contract, and the other is a perpetual contract, the former agrees on the delivery time of the contract, and the latter does not agree on the delivery time.
1. What is a delivery contract?
A delivery contract refers to a futures contract that both parties agree to buy and sell the contract at a specified time, that is, the delivery date, at the price of the futures. The contract price is all formed by the market mechanism, and the profit and loss is calculated using the latest transaction price instead of an index.
– The type of contract to be delivered
Delivery contracts are generally divided into four types according to different delivery times, namely: current week, next week, current quarter, and second quarter.
- Weekly contracts refer to contracts that are delivered on the Friday closest to the trading day;
- The next weekly contract refers to the contract that is delivered on the second Friday closest to the trading day;
- Quarterly contract refers to the contract whose delivery date is the last Friday of the nearest month in March, June, September and December, and does not coincide with the delivery date of the weekly/next week.
- A bi-quarterly contract is a contract whose delivery date is the last Friday of the month closest to the current second month in March, June, September and December, and does not coincide with the delivery date of the weekly/biweekly/quarterly contract.
Special case: Under normal circumstances, a new bi-weekly contract will be generated after settlement and delivery every Friday. However, after the settlement of the third to last Friday of the quarterly month, there are only 2 weeks left for the current quarterly contract to expire, which is the next weekly contract, and if a new second weekly contract is generated at this time, the two contracts will have the same expiration date. Therefore, after the settlement and delivery on the third to last Friday of the 3rd, 6th, 9th, and 12th months of the quarter month, the system will not generate the next weekly contract, but a new second-quarter contract and the original second-quarter contract will become the current quarter contract, and the original quarterly contract will become the next weekly contract.
2. What is a perpetual contract?
Perpetual contract is an innovative financial derivative that is developed based on the delivery contract, but there are many differences from the previous one. A perpetual contract is similar to a collateral market, its price is close to the price of the underlying reference index, and there is no concept of the expiration date. As long as the contract does not blow up, you can hold it forever.
– Necessary knowledge points for playing perpetual contracts
Knowledge point 1 – capital cost mechanism
The funding mechanism is the most important feature of perpetual contracts, which allows them to always be anchored to the spot price. Perpetual contracts do not have an expiration date, but they will settle funding every 8 hours.
- If the funding rate is positive, the long side will have to pay the funding fee to the short side;
- If the funding rate is negative, the short side will have to pay the funding fee to the long side.
Calculation formula: Funding fee = net position value * funding rate.
Knowledge point 2 – forward contract and forward contract
- Forward contracts are generally denominated in USDT, and USDT is used as collateral to calculate profit and loss.
- Inverse contracts, also known as coin-margined contracts, take BTC as an example, denominated in USDT, but use BTC to collect collateral and calculate profit and loss.
Knowledge point 3 – ladder liquidation function
Tiered liquidation, i.e. partial liquidation, when a user’s position is triggered, the system will first determine the corresponding level of the user’s net position, and partially liquidate the position to the next level by reducing the position, if the margin ratio is still less than or equal to 0 when the net position of the first level is calculated, all the user’s positions will be liquidated.
