Introduction
Futures contract 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 brokers on the market. Binance offers a robust trading engine that allows traders and hedgers to speculate on many different cryptocurrencies. Additionally, Binance offers high leverage trading and various collateral options.
Most futures products listed on Binance Futures are perpetual futures contracts, that is, contracts that have no expiration date. However, there are many ways to speculate on the price of financial assets using futures contracts. One of them is quarterly futures trading.
In this article, we will look at how quarterly futures work and what you need to know to trade on Binance using this feature.
If you want to know more about futures and forward contracts, see our article.
What are quarterly futures contracts?
A futures contract is a contract to buy or sell an asset at a predetermined price on a future date. This is the expiration date – this is when contracts are settled and assets are delivered.
Binance quarterly futures are cash-settled. What this means? It means that the settlement of the underlying asset is delivered in cash. In the case of Binance quarterly futures, that asset is BTC.
Binance quarterly futures contracts 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. We also call this the delivery date, as this is when the underlying asset (BTC) is delivered.
In traditional financial markets, such as equities, derivative products attract considerably higher trading volumes than spot markets. We also see this in the cryptocurrency markets. There is higher volume and deeper liquidity in futures markets when compared to spot markets. Therefore, if traders think an asset will perform well, futures trading can be a great way to speculate on future price movements.
How do quarterly futures contracts work?
The margin used for Binance quarterly futures is in BTC, contracts are settled in BTC, and trading fees are also paid in BTC.
Like other Binance products, quarterly futures contracts follow a multi-tiered fee system. However, Binance has another advantage. Some tiers also offer negative rates (or fee discounts) for makers. In other words, traders who provide liquidity to the market are, in a way, paid for it.
If you have a position open after expiration, you must pay a delivery fee. Note that you will not be able to open quarterly futures positions 10 minutes before expiration. The settlement fee follows the Fee Schedule and will be charged as a taker fee for all positions settled on the delivery date.
The tick size on quarterly futures products is $0.10. That is, price changes to the contract occur in increments of $0.10. On the other hand, the tick size of Binance's perpetual futures products is $0.01. Keep an eye on maintenance margin requirements and make sure you adopt proper risk management.
It is also important to remember that the higher the leverage used, the smaller the maximum position size you can open. Would you like to know a simple formula for position size? Check out our article How to Calculate Position Size in Trading.
Quarterly vs. quarterly futures perpetual futures – what’s the difference?
Now we know the main difference – the quarterly future expires, the perpetual future does not. What are the other differences between them?
Some futures contracts will automatically “roll over” to the next contract after expiration. This means that when the current contract expires, the open positions will essentially be transferred to the next contract. In fact, this is how perpetual futures contracts work, but not on a quarterly basis. However, this is not the case with Binance quarterly futures. When the expiration date arrives, quarterly contracts expire based on the last hour's average price and are settled in BTC.
Unlike perpetual futures, the price index for quarterly futures is based on the BTC/USD market and not the BTC/USDT market. This allows traders to hedge against the risk of USDT losing its link to the USD.
The index price is made up of a moving average of the BTC/USD market price on the following exchanges: Bitstamp, Coinbase Pro, Kraken, Bittrex and Binance. All of these markets are equally weighted in the index. This index is used to calculate the reference price (Mark Price), used for settlements. Don't know what Mark Price is? Check out our chapter on this in our futures guide.
Another important difference is the payment of fees. If you trade perpetual futures, you will have to pay a funding fee every 8 hours. This payment is made between market participants to keep the perpetual futures market price close to the spot price. You can think of it as something similar to the interest rate, but it is a payment between traders.
When financing is positive, long positions pay short positions, when financing is negative, shorts pay longs. However, quarterly futures do not have funding fees associated with them. This makes them ideal for long-term investments, as the funding rate will not gradually reduce the position over time. But at the same time, perpetual futures might be more suitable for you if you are looking for short-term trades. It all depends on your risk profile and trading style.
If you want to know more about perpetual contracts, check out our article What Are Perpetual Futures Contracts?.
The benefits of trading quarterly futures on Binance
One advantage of Binance quarterly futures contracts is that you can use BTC as margin and they are settled in BTC. This means you must also commit your initial margin in BTC.
Why is this an advantage? The use of BTC allows large traders (known as whales) or even retail traders to hedge their BTC holdings. As? They could, for example, open a short position. If the price of BTC falls, they can offset their dollar losses with their BTC profits. In other words, the dollar value of BTC could fall, but they would gain more BTC by profiting from the short position.
Additionally, these contracts are a great way to grow your BTC holdings. Since they are settled in BTC, profits can increase their BTC value over the long term.
Binance quarterly futures can also open up favorable arbitrage opportunities for large traders. Let's learn about how this works.
There are two concepts we need to understand here: contango and backwardation. Contango is when futures contracts are trading above the spot price of the underlying asset. Backwardation is when futures contracts trade below spot market value.
In both cases, large traders (whales or large hedge funds) can profit from the difference between the spot price and the futures price, however 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 typically requires the use of complex hedging and risk management strategies and is not recommended for beginner traders.
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Final considerations
Binance's quarterly futures contracts allow traders to speculate on the price of a financial asset using their bitcoins. Quarterly futures contracts are settled in BTC and can be ideal for swing trades as there are no funding fees associated with them.
Futures trading can be a great way to speculate in the cryptocurrency markets. If you want to read a complete guide on the subject, check out the article Definitive Guide to Trading on Binance Futures.