Most people in crypto are “spot” buyers. They buy a token, transfer it to a wallet, and wait for the price to move higher. That is investing. But for us – active market participants – that can be a relatively inefficient use of capital.
If traders want to extract more value from volatility, we don’t just buy the asset; we trade the price action.
This is the domain of futures. When we engage in crypto futures trading, we aren’t taking custody of 1 BTC or 10 ETH. We are entering into a contract that represents the value of those assets. This distinction changes how positions are structured. It allows us to use leverage – borrowing liquidity from the exchange to control a position 10x or 50x larger than our account balance. It grants us capital efficiency, meaning we can keep the bulk of our net worth in stablecoins or cold storage while only risking a small margin to capture larger price moves.
How crypto futures work
To operate effectively in this market, we first have to understand that we are trading derivatives, not assets. When we open a position, we aren’t “buying Bitcoin”; we are signing a contract that agrees to buy or sell Bitcoin at a specific price. This abstraction is what allows for leverage.
- Leverage and margin.This is the double-edged sword. Leverage allows us to put down a small amount of collateral – known as “initial margin” – to control a much larger position size. If we use 10x leverage, a $1,000 deposit lets us open a $10,000 trade. This means a 10% move in the market doubles our account. However, it also means a 10% move against us leads to liquidation.
- Perpetuals vs expiry. In traditional finance, futures contracts have an expiration date (e.g., “December Bitcoin Futures”). In crypto, the dominant instrument is the Perpetual Swap (“Perp”). These contracts never expire. Instead, they use a mechanism called the “Funding Rate” to keep the contract price tethered to the spot price. If more people are Long than Short, the Longs pay the Shorts a fee every 8 hours, and vice versa.
- The zero-sum game. Futures are a Player-vs-Player (PvP) arena. Unlike the spot market where everyone can profit if the asset appreciates, futures are zero-sum. For every dollar we profit, someone else on the other side of the trade loses a dollar. Learning how to trade crypto futures effectively requires accepting that we are extracting liquidity from counterparties with weaker positioning.
Because of this high-stakes environment, the reliability of the exchange becomes critical – a point examined in detail in this review through the lens of solvency and platform security.
Why traders use crypto futures
We don’t step into the futures arena for the dopamine hit; we do it for utility. This instrument offers specific tactical advantages that the spot market simply cannot match, allowing us to remain profitable regardless of the macro direction.
First, there is the power of speculation and shorting. In the spot market, we are helpless during a bear cycle – forced to sell into stablecoins and sit on our hands. Futures unlock the ability to “short,” allowing us to profit aggressively when the market dumps. We stop fearing the red candles and start farming them.
Then, there is the “professional” play: hedging. Let’s say we hold a significant Bitcoin position in cold storage that we don’t want to sell due to tax implications or long-term conviction. If we anticipate a short-term crash, we open a short position on futures. If the price of Bitcoin drops, our spot portfolio loses value on paper, but our futures short prints money, offsetting the loss. This leads us to the core utility of what are crypto futures for institutional players: they are risk transfer mechanisms. They allow us to neutralize price volatility without ever liquidating our underlying assets.
Finally, we trade futures for capital efficiency. Why lock up $100,000 to get exposure to 1 BTC when we can get the same exposure with just $10,000 in collateral? By using leverage, we keep the majority of our net worth liquid – perhaps earning yield in DeFi protocols – while still maintaining full exposure to the market’s upside. This allows capital to be allocated more efficiently.
Perpetual futures explained
In traditional markets, futures contracts have a ticking clock. If you buy a December oil contract, you have to sell it or roll it over before December. Crypto markets are designed to reduce operational friction, so we invented the Perpetual Contract (or “Perp”).
As the name implies, these contracts have no expiration date. We can hold a position for ten minutes or ten years, provided we have enough margin to avoid liquidation.
Without an expiration date to force the futures price to match the spot price at settlement, Perps need a different anchor. This is where the Funding Rate comes in. It is a peer-to-peer payment exchanged between Longs and Shorts every 8 hours.
This mechanism is the defining answer to what are futures in crypto distinct from traditional assets. It works like a thermostat:
- Positive Funding: If the Perp price is higher than Spot (bullish), Longs pay Shorts. This incentivizes traders to sell (short) and drive the price down.
- Negative Funding: If the Perp price is lower than Spot (bearish), Shorts pay Longs. This incentivizes traders to buy (long) and drive the price up.
For us, funding isn’t just a fee; it represents a sentiment indicator. When funding is negative, we know the crowd is overly bearish – and we get paid to take the contrarian Long position.
