Introduction
Trading futures contracts 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. Binance offers a reliable trading system that allows traders and hedgers to speculate on many different cryptocurrencies. It also offers highly leveraged trading and multiple collateral options.
Most futures products listed on Binance Futures are perpetual futures contracts, meaning the contracts do not have an expiration date. However, there are many ways to speculate on the price of financial instruments using futures contracts, and one of them is quarterly futures.
In this article, we will look at how quarterly futures work and what you need to know if you want to trade them on Binance.
If you want to learn more about futures and forward contracts first, check out our article.
What are quarterly futures contracts?
A futures contract is an agreement to buy or sell an asset at a predetermined price in the future. This date is called the expiration date, when the contracts are settled and the asset is delivered.
Binance quarterly futures are settled in cash. What does it mean? Cash settlement means that the underlying asset is provided in the form of currency. In the case of Binance Quarterly Futures, that asset is BTC.
Quarterly futures contracts on Binance expire on the last Friday of each quarter. For example, the BTCUSD 0925 contract expires on the last Friday of Q3, 2020, September 25. This can also be referred to as the delivery date, as this is when the underlying asset (BTC) is delivered.
In traditional financial markets, such as the stock market, derivative financial instruments attract significantly higher trading volume than spot markets. We also see this in the cryptocurrency markets. Futures markets have a larger volume and greater liquidity compared to spot markets. So, if traders think that a particular asset will do well, futures trading can be a great way to speculate on future price movements.
How do quarterly futures contracts work?
Quarterly futures on Binance are margined in BTC, contracts are settled in BTC, and trading fees are also paid in BTC.
Like other Binance products, quarterly futures contracts have a tiered commission system. However, there is an additional benefit. Some tiers also offer negative commissions (or discounts) to makers. This means that traders who provide liquidity to the market are essentially getting paid for it.
If you have an open position after the expiration date, you will have to pay a delivery fee. Please note that you will not be able to open quarterly futures positions 10 minutes before the deadline. The settlement commission corresponds to the Commission Structure and is charged as a taker's commission on all positions calculated on the delivery date.
The tick size for quarterly futures products is $0.10. This means that the contract price changes in $0.10 increments. In contrast, the tick size for Binance Perpetual Futures is $0.01. Keep a close eye on your margin requirements and make sure you manage your risks properly.
It is also worth noting that the higher the leverage you use, the smaller the maximum position size you can open. Want to learn a simple position sizing formula? Learn how to calculate position size when trading.
What is the difference between quarterly and perpetual futures?
So, we already know the difference: quarterly futures have an expiration date, while perpetual futures do not. But how else are they different?
Some futures contracts are automatically rolled over to the next contract when they expire. This means that when the current contract expires, open positions are essentially carried over to the next contract. In fact, this is how perpetual futures contracts work. However, this does not apply to Binance Quarterly Futures. After expiration, the quarterly contracts expire at the average price of the last period and are settled in BTC.
Unlike perpetual futures, the index price for quarterly futures is based on the BTC/USD market, not the BTC/USDT market. This allows traders to hedge the risk of USDT decoupling from USD.
The index price consists of the moving average market price of BTC/USD on the following exchanges: Bitstamp, Coinbase Pro, Kraken, Bittrex and Binance. All these markets have the same weight in the index. This index is used to calculate the markup price used for liquidation. Don't know what the markup price is? Read our chapter on this in our futures guide.
Another key difference is the fees you will have to pay. If you trade perpetual futures, you will have to pay a funding fee every 8 hours. This funding payment is made between market participants to keep the price of the perpetual futures market close to the spot price. You can think of it as something similar to an interest rate, 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 do not incur a funding fee. This makes them ideal for long-term holding, as the funding fee will not gradually reduce the position in small increments over time. However, perpetual futures may be a better fit for you if you are looking for a short-term trade. It all depends on your risk profile and trading style.
If you want to learn more about perpetual contracts, check out the article What are perpetual futures contracts?.
Advantages of Binance Quarterly Futures Trading
One of the advantages of Binance Quarterly Futures is that you can use BTC as margin and settlements are made in BTC. This means you must also deposit your initial margin in BTC.
Why is it beneficial? Using BTC allows large traders (kits) or even retail traders to hedge their BTC holdings. How can they do this? For example, they could open a short position. If the price of BTC falls, they will be able to offset the USD losses with BTC profits. In other words, the value of BTC to USD may go down, but they will get more BTC by using a short position.
Also, these contracts are a great way to simply increase your BTC holdings. Since they are settled in BTC, profits can increase your long-term BTC stack.
Quarterly futures on Binance can also open up favorable arbitrage opportunities for large traders. Let's find out how it works.
Here we need to understand two concepts: contango and backwardation. Contango is when futures contracts trade above the spot price of the underlying asset. Backwardation is when futures contracts trade lower than the spot market.
In both of these cases, large traders (such as whales or hedge funds) can profit from the difference between the spot price and the futures price, however small. They do this by buying futures contracts and selling spot hold assets at the same time, or vice versa. However, this generally requires complex hedging and risk management strategies and is not recommended for novice traders.
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Results
Binance Quarterly Futures allows traders to speculate on the price of a financial asset using their Bitcoin. Quarterly futures contracts are settled in BTC and can be ideal for swing trades as they do not charge a funding fee.
Futures trading can be a great way to speculate in the cryptocurrency markets. If you want to read a detailed guide on this, check out The Complete Guide to Trading Binance Futures.