Introduce
Futures trading is a convenient way to speculate on the price of a financial asset. When it comes to cryptocurrency trading, Binance Futures is one of the largest futures exchanges around. Binance offers a powerful trading engine that allows traders and hedgers to speculate on a variety of cryptocurrencies. It also offers high leverage trading and multiple collateral options.
Most futures products listed on Binance Futures are perpetual futures contracts, meaning the contract has no expiration date. However, there are many ways to speculate on the prices of financial instruments using futures contracts, and one of them is quarterly futures contracts.
In this article, we will learn how quarterly futures work and what you need to know if you want to trade them on Binance.
If you want to read more about futures and forward contracts, check out our article on them.
What are quarterly futures contracts?
A futures contract is an agreement to buy or sell an asset at a predetermined price at a future date. This date is called maturity - this is the moment when contracts are settled and assets are delivered.
Quarterly futures contracts on Binance are settled in cash. What does that mean? Cash settlement simply means that the underlying asset is distributed in the form of currency. In the case of quarterly futures contracts on Binance, this asset is BTC.
Quarterly futures contracts on Binance expire on the last Friday of each quarter. For example, the BTCUSD 0925 contract will expire on the last Friday of Q3 2020 - September 25, 2020. This can also be called the delivery date because this is when the underlying asset (BTC) is delivered.
In traditional financial markets such as the stock market, derivatives attract a significantly higher trading volume than spot markets. We also see this in the cryptocurrency markets. Futures markets have a higher trading volume and deeper liquidity when compared to spot markets. So, if traders think there is a particular asset that will do well in price, trading futures contracts can be a great way to speculate on future price movements.
How do quarterly futures work?
The margin used for quarterly futures contracts on Binance is BTC, contracts are settled in BTC and trading fees are also paid in BTC.
Just like other Binance products, quarterly futures contracts follow a multi-tiered fee system. However, there is a margin factored in with some tiers having negative fees (or rebates) for makers. Traders will be reimbursed for providing liquidity to the market.
If you have an open position that expires, you will have to pay a contract transfer fee. Note, you will not be able to open quarterly futures positions 10 minutes before expiration. Settlement fees are set according to the Fee Schedule and are charged as a fee to the buyer for all positions settled on the transfer date.
The tick size on quarterly futures products is $0.10. This means that price changes in the contract occur in $0.10 increments. In contrast, the tick size of perpetual futures products on Binance is $0.01. Keep a close eye on margin requirements and ensure you practice adequate risk management.
It is also important to note that the higher the leverage you use, the smaller the maximum position size that can be opened. Do you want to know about a simple formula for position sizing? See how to calculate position size in trading.
Quarterly futures vs. Perpetual futures contract
So, we know the main difference - quarterly futures contracts have an expiration date, while perpetual futures contracts have no expiration date. But what are the other differences?
Some futures contracts will automatically “roll over” to the next contract upon expiration. This means that when the current contract expires, open positions are essentially rolled over to the next contract. In fact, this is essentially how perpetual futures contracts work, not on a quarterly basis. However, this is not the case with Binance's quarterly futures contracts. When the expiration date arrives, quarterly contracts will expire at the average price of the last hour and be settled in BTC.
In contrast to perpetual futures contracts, the quarterly futures price index is based on the BTC/USD market, not the BTC/USDT market. This allows traders to hedge the risk if USDT decouples from the USD.
The price index is made up of a moving average of the BTC/USD market price on the following exchanges: Bitstamp, Coinbase Pro, Kraken, Bittrex, and Binance. These markets are all equally weighted on the index. This index is used to calculate the Mark Price, which is used for liquidation. Don't know what a Mark Price is? Read a chapter about it in our futures guide.
Another key difference is the fees you will have to pay. If you are trading perpetual futures contracts, you will be charged a funding fee every 8 hours. This funding payment is settled between market participants to keep the futures market price permanently close to the spot price. You can think of it as something similar to interest, but it is paid between traders.
When funding is positive, long positions pay short positions, when funding is negative, short positions pay long positions. However, quarterly futures contracts do not have funding fees associated with them. This makes them ideal for long-term holding because funding fees will not dilute the position over time. At the same time, perpetual futures contracts may be more suitable for you if you are looking for short-term trading. It all depends on your risk profile and trading style.
If you want to read more about perpetual contracts, see What are perpetual futures contracts?.
Benefits of trading quarterly futures contracts
One advantage of quarterly futures contracts on Binance is that you can use BTC as margin and they are settled in BTC. This means you must also commit your initial deposit in BTC.
Why is this a benefit? Using BTC allows large traders (whales) or even retail traders to hedge their BTC holdings. How do they do it? For example, they can open a short position. If the BTC price drops, they can counter their USD losses with their BTC profits. In other words, the USD value of BTC may decrease, but they will earn more BTC by profiting from the short position.
Additionally, these contracts are a good way to increase your BTC assets. Since they are settled in BTC, the profits can help increase your long-term BTC.
Binance's quarterly futures contracts could also open up profitable speculation opportunities for large traders. Let's learn about how they work.
There are two concepts we need to understand here: contango and contango. Contango is when futures contracts are trading above the spot price of the underlying asset. Contingency is when futures contracts are trading below the spot market.
In both of these cases, large traders (like whales or hedge funds) can profit from the difference between spot and futures prices, however small the difference can be. They do it by buying futures contracts and selling spot assets at the same time or vice versa. However, this often requires hedging and risk management strategies and is not for new traders.
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Conclude
Futures contracts on Binance allow traders to speculate on the price of a financial asset using their bitcoins. Quarterly futures contracts are settled in BTC and are ideal for swing trades as there is no funding fee attached to them.
Futures trading can be a great way to speculate on the cryptocurrency markets. If you want to read a comprehensive guide about it, check out The Ultimate Guide to Trading on the Binance Futures Exchange.