Introduction
Trading futures contracts is an easy way to speculate on the prices of financial assets. When it comes to cryptocurrency trading, Binance Futures is one of the largest futures exchanges available today. Binance offers a powerful trading engine, helping traders in speculating on various crypto assets. Also offers high leverage trading and multiple collateral options.
Most of the futures products listed on Binance Futures are perpetual futures contracts, meaning they have no expiration date. However, there are many ways to speculate on the price of financial instruments using futures contracts, one of which is quarterly futures.
In this article, we'll discuss 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 perpetual futures and futures contracts first, check out our article on the topic.
What is a quarterly futures contract?
Futures contracts or futures contracts are agreements to buy or sell assets at a predetermined price in the future. This future date is called the expiration date – this is when the contract is completed and the asset is delivered.
Quarterly Binance futures are cash settled. What does it mean? Cash settlement means that the underlying asset exists in the form of currency. In quarterly Binance futures, the 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 2020 Q3 – 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 much higher trading volumes than spot markets. We also see this in the cryptocurrency market. There is higher volume and deeper liquidity in the futures market when compared to the spot market. So, if a trader thinks a particular asset will perform well, futures trading can be a suitable means to speculate on future price movements.
How do quarterly futures contracts work?
The margin used in quarterly futures 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-tier fee system. However, there are additional benefits. Some tiers will offer negative fees (or reduced fees) for makers. This means that traders who provide liquidity into the market will essentially get paid.
If you have an open position after the expiration period, you will have to pay a delivery fee. Please note that you will not be able to open a quarterly futures position 10 minutes before expiration. Settlement fees follow the Schedule of Fees and are charged as a taker fee for all positions settled on the delivery date. If you have an open position at expiration, you must pay a delivery fee of 0.015%. Please note that you will not be able to open a quarterly futures position 10 minutes before expiration.
The tick size in the quarterly futures product is $0.10. This means that price changes in the contract occur in increments of $0.10. While the tick size of Binance's perpetual futures product is $0.01. Pay close attention to margin position requirements, and ensure you carry out proper risk management.
It is also worth noting 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 positioning? See How to Calculate Position Size in Trading.
Quarterly vs. regular futures perpetual futures – what is the difference?
So, we already know the main difference – quarterly futures have an expiration date, perpetual futures do not. However, what else is different about the two?
Some futures contracts will automatically roll over to the next contract after expiration. Meaning that when the current contract expires, open positions are essentially transferred to the next contract. This is actually how perpetual futures work, just not every quarter. However, it is different from quarterly Binance futures. Once the expiration date arrives, the quarterly contract expires at the average price of the last hour and is settled in BTC.
Unlike perpetual futures, the price index for quarterly futures is based on the BTC/USD market, not the BTC/USDT market. This allows traders to hedge against the risk of USDT decoupling from USD.
The index price consists of a moving average of BTC/USD market prices on the following exchanges: Bitstamp, Coinbase Pro, Kraken, Bittrex, and Binance. These markets are all equally weighted in the index. The index is used to calculate the Mark Price, which is used for liquidation. Don't know what Mark Price is? See our article on futures guidance.
Another major difference is the fees you have to pay. If you trade perpetual futures, you have to pay a funding fee every 8 hours. Funding fees are paid between market participants to keep the perpetual futures market price close to the spot price. You can think of it as similar to an interest rate, but paid between traders.
When funding is positive, the long position pays the short position, when funding is negative, the short pays the long. However, quarterly futures do not have a funding fee. This makes it ideal for long-term holding because there is no funding fee deduction, so it will not reduce the position size over time. However, on the other hand, perpetual futures may be more suitable for you, if you want short-term trading. It all depends on each person's risk profile and trading style.
If you want to read more about perpetual contracts, see What is a Perpetual Futures Contract?.
Quarterly futures trading profits on Binance
One of the advantages of Binance quarterly futures contracts is that you can use BTC as margin, and it is settled in BTC. This means you have to make initial margin, also in BTC.
Why is this considered an advantage? Using BTC allows whales or even retail traders to hedge their BTC holdings. How to do it? For example, they can open a short position. If the BTC price falls, they can offset USD losses with BTC profits. In other words, the USD value of BTC may fall, but they will gain more BTC by taking profit from the short position.
Additionally, these contracts are a great way to simply increase your BTC holdings. Since it is settled in BTC, profits can increase your long-term BTC stack.
Quarterly Binance futures can also open up arbitrage opportunities, profitable for larger traders. Let's see how it works.
There are two concepts we need to understand here: contango and backwardation. Contango is when a futures contract trades higher than the spot price of the underlying asset. Backwardation is when a futures contract trades lower than the spot market.
In both circumstances, large traders (such as whales or hedge funds) can profit from the difference between the spot price and the futures price, no matter how small that difference may be. They do this by buying futures contracts and selling spot holdings at the same time, or vice versa. However, this usually requires complex hedging and risk management strategies, and is not recommended for novice traders.
Do you want to own cryptocurrency? Buy Bitcoin on Binance!
Closing
Binance quarterly futures help traders to speculate on the price of financial assets using bitcoin holdings. Quarterly futures contracts are settled in BTC, perhaps ideal for swing trading, as there are no funding fees.
Futures trading can be an ideal way of speculating in the crypto market. If you want to read a comprehensive guide on this, check out our Essential Guide to Trading on Binance Futures.