Main conclusions:
One of the main differences between perpetual and quarterly futures is the expiration date.
Quarterly futures have no funding fees.
These two types of contracts are designed to meet different needs.
One of the main benefits of futures trading is the ability to gain access to a larger volume of the underlying cryptocurrency at a fraction of the market cost. This means you can make huge profits even from small price movements.
There are many different financial instruments to trade. Binance Futures offers two flagship derivatives trading products: perpetual and quarterly futures.
A question we often receive from users is: what are the differences between these two products and what are the key features that set them apart? In this article, we will try to answer these questions to help traders discover new ways to diversify.
Perpetual Futures vs Quarterly Futures: What's the Difference?
First, let's compare perpetual and quarterly futures contracts.
More information can be found in our FAQs and related guides.
1. Expiration date
A classic futures contract allows you to buy or sell an underlying asset at a predetermined price before a specific date. In other words, futures contracts have a limited validity period and their settlement date depends on the expiration calendar. For example, BTC 0925 is a quarterly futures contract that expires 3 months from its issue date.
Perpetual futures, as the name suggests, on the other hand, do not have an expiration date. Therefore, users do not need to track execution months as is the case with quarterly futures. For example, a trader can hold a short position indefinitely until it is liquidated.
It is important for every trader to understand what is happening in the market during the expiration period and how this affects the exit strategy. Before you get started, there are two terms you should be familiar with: expiration date and rollover.
The expiration date is the last day that a trader can trade the contract. For example, the BTCUSD 0925 quarterly contract expires on September 25, 2021, and the BTCUSD 1225 contract expires on December 25, 2021. Before the expiration date, the trader has several options:
Close the position before expiration.
Move to the next contract after the expiration of the current nearest contract - i.e. perform a rollover.
Allow the contract to expire and then settle.
2. Rollover
Because perpetual contracts do not have an expiration date, users do not need to roll over their positions to the next contract.
“Rollover” is the transfer of a contract with the nearest expiration month to a contract with the next expiration month. Transferring to another month avoids the costs and obligations associated with contract settlement. To roll over a futures contract, simply sell your open position on the nearest contract while simultaneously purchasing another contract with the next expiration month. For example, if you are long the September BTCUSD futures by 10 units, you would sell 10 September contracts and buy 10 December contracts.
Traders determine the timing of the rollover by comparing the volume and liquidity of the expiring contract and the next month's contract. Typically, the expiring contract volume decreases as the expiration date approaches.
A rollover can be made at any time before the expiration date, however we recommend rolling over your positions a few days before the expiration date. Low liquidity on the expiration date can cause the bid-ask spread to widen and cause slippage.
3. Funding fees
Unlike perpetual futures contracts, quarterly futures do not have a funding fee. This is beneficial for long-term traders and hedgers as funding fees can change over time. In particularly volatile market conditions, financing fees may prove too costly to maintain a long-term position.
In addition, when calculating funding fees, the amount of leverage used is taken into account, which can have a large impact on the PnL ratio.
As shown in the chart above, funding fees on BTC perpetual contracts can increase as the price of Bitcoin rises, indicating an imbalance towards buyers in the market. This effect will make holding long positions more costly over time.
The graph shows that the funding fee doubled in a few hours from 0.05% to 0.1% amid rising demand for BTC futures. In this case, the funding fee for a $100,000 position would be $100.
4. BTC и USDT Margined
Binance Futures quarterly contracts are denominated and settled in BTC. In other words, you can top up your initial margin in BTC without having to convert your tokens to stablecoins like Tether (USDT).
To hedge your BTC, you need to take a short position with the BTCUSD 0925 quarterly futures contract. If the price of BTC falls, then the profit from the futures position can offset the losses in your portfolio. Since settlement is done in Bitcoin, profits can increase your long-term BTC stack. This is a great way to increase your BTC supply in the long term.
5. Trading strategy
Trading quarterly futures provides a lot of opportunities for traders, allowing them to build strategies for generating profitability regardless of market conditions. These strategies are common in traditional futures markets and apply to cryptocurrencies.
Here are a few neutral strategies you might consider:
A basis trade typically consists of a long position in the underlying crypto asset and a short position in its derivative (in most cases this applies to futures contracts). The basis is the difference between the futures price and the spot price of the underlying asset. It can be positive or negative, but typically futures contracts trade at a premium to the spot market. Typically, the longer the contract term, the greater the basis.
Spread trading is the simultaneous purchase and sale of two related futures contracts. For example, if you bought the September BTCUSD contract and sold the December BTCUSD contract, this would be considered a spread trade. When trading a spread, the benefit arises from the difference in the prices of two contracts. When you are in a spread position, you want the long side of the spread to increase in value relative to the short side and vice versa.
Conclusion
Perpetual and quarterly futures are designed to meet specific user needs. Overall, the futures market provides unprecedented trading flexibility, allowing traders to take long and short positions using leverage. In addition, this type of trading allows traders to create neutral market strategies with returns that do not depend on the general direction of the markets.
Futures are especially useful for portfolio diversification. If you are interested in futures trading, it is important to understand the pros and cons of perpetual and quarterly futures contracts. To get the most out of futures trading, you can start by finding the right exchange and diversifying your portfolio. For more information on futures trading on Binance, check out the following articles:
(Blog) Cryptocurrency futures: what you need to know when starting to trade.
(Blog) Cryptocurrency Futures Risks and Money Management: 5 Ways to Better Manage Risks When Trading.
(Support) Overview of Binance Futures products and features.
...and many other frequently asked questions about Binance Futures.
Article edited June 27, 2022