Futures Contracts
Module 1 established what derivatives are and why they exist. This module gets into the mechanics of the most important type: the futures contract. These are the things you need to understand before you place your first trade.
Perpetual vs. expiring futures.
A perpetual futures contract has no expiration date. You can hold it indefinitely. It is the dominant instrument in crypto derivatives: over 90 percent of retail futures volume flows through perpetuals. The mechanism that keeps the perpetual price anchored to spot is the funding rate, covered below.
An expiring futures contract settles on a fixed date. Before that date it trades at a premium or discount to spot, known as the basis. In a bullish market, futures typically trade above spot, a condition called contango. In a bearish market or during periods of high fear, futures can trade below spot, a condition called backwardation. The basis converges to zero at expiry regardless of where spot goes. That convergence is predictable, and is the basis of the carry trades covered in Module 5.
Going long means you profit when price goes up. Going short means you profit when price goes down. Unlike shorting in spot markets, shorting futures requires no borrowing. You simply open a short position. This is one of the most powerful features of derivatives: the ability to profit in down markets with the same ease as profiting in up markets.
Margin types.
Two dimensions determine what you are risking and how it is denominated: what currency your margin is in, and how much of your account that margin exposes.
Margin and P&L in USD. A price move of $1,000 produces a predictable dollar gain or loss. Simpler to manage. Most major retail exchanges use USD-settled contracts.
Margin and P&L in the underlying crypto. P&L is non-linear: a rising BTC price changes the USD value of your margin in real time. Useful for miners hedging BTC income without converting to USD. More complex.
Risk is limited to the margin allocated to that specific position. If the position is liquidated you lose that margin only. Other positions and your remaining balance are unaffected. Best for most retail traders.
Your entire account balance is used as margin across all open positions. A losing position draws from the same pool as your other positions. More efficient on capital, but a single bad trade can wipe your full account.
Funding rates: the real cost of holding a perpetual.
The funding rate is a periodic payment between longs and shorts. Calculated every eight hours on most exchanges, it is based on the difference between the perpetual price and the spot index. When the perpetual trades above spot, longs pay shorts. When it trades below spot, shorts pay longs.
0.05% per 8h → ~54% annualized
0.1% per 8h → over 100% annualized
Funding rates are also one of the best sentiment signals in crypto. Persistently high positive funding means the market is crowded with longs, and those longs are paying heavily to stay in their positions. History shows this is often a precursor to a sharp reversal, not because funding causes the reversal, but because it signals the degree of over-leverage that makes a cascade possible.
The full breakdown of how the rate is calculated, along with the four funding regimes and what each one means for a trade you are about to place, is covered in the topical lesson on How to Read the Funding Rate Before Every Trade.
Leverage and liquidation.
Leverage multiplies your position size relative to your margin. At 5x, $2,000 in margin controls a $10,000 position. A 10 percent adverse price move produces a $1,000 loss, 50 percent of your margin. At 10x, the same 10 percent move wipes the margin entirely, the same relationship the worked example in Module 1 walked through.
Liquidation occurs automatically when your margin balance falls to the maintenance margin threshold. The liquidation price is calculable before you enter: approximately your entry price minus your margin per unit of position for a long, and entry price plus margin per unit for a short. Know it before you open the trade.
Rule of thumb: leverage of 3 to 5x gives you a buffer to manage a position actively. Above 10x, a single volatile candle can trigger liquidation before you can react. Use isolated margin so one bad position cannot wipe your account.
For your first trades: USD-settled, isolated margin. That combination gives you predictable dollar P&L and a loss capped at what you put into that one position. Coin-margined contracts and cross margin both add a layer of complexity worth learning once you have a few trades of experience, not before.
Before opening any futures position.
Decide your direction, long or short, and write down why before looking at the order screen.
Select isolated margin mode. This limits your maximum loss to the margin allocated to this trade.
Choose your leverage. Start at 3x or lower. Calculate your liquidation price using the platform calculator before confirming.
Check the current funding rate. Multiply by 3 for the daily rate, then by 365 for the annualized cost. If you are going long and annualized funding exceeds 50 percent, factor that carry cost into how long you plan to hold.
Set your stop-loss at a technical level, not at your liquidation price. Your stop should trigger well before liquidation does.
Go to CoinGlass before entering. Check open interest direction, the long/short ratio, and recent liquidation clusters near the current price.
May 2021: the China mining ban cascade.
Know your numbers before every trade.
Perpetual futures dominate because they are simple to hold and the funding rate keeps them connected to spot. Knowing your leverage, liquidation price, margin mode, and funding cost before entry is the baseline of professional risk awareness. Module 3 builds on this foundation by introducing options. The risk structure is fundamentally different: no liquidation, but time decay and implied volatility working for or against you every day the position is open.
This content is produced by Harmonic for educational purposes. It is strategy education, not investment advice.
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