Hey guys! I am planning to start a new mini series on Futures trading, specifically on Binance. I have had many friends interested in crypto ask me about "futures" and it always seem daunting at the start but it's a lot easier than it looks! In this series, I plan to cover the following basics but please let me know if there's anything else you would like me to cover.
- Introduction to perpetual futures (this article)
- How to trade futures on Binance (1)
- How to trade futures on Binance (2)
- How to use leverage to multiply your gains and losses
- Futures pricing and explanation of the "funding fee"
- How to use the funding fee for passive income
- Basic hedging strategies
- My view on the market - I am bearish (not financial advice)
Disclaimer: Before we begin, I would like to mention these articles are not to be taken as financial advice but rather as educational articles. Furthermore, all links to Binance seen in these articles are affiliate links. Sign up with these links to support my content and enjoy 10% off futures trading for 30 days, even if you already have a Binance account, you can still use this link if you've never traded futures before!
Introduction to Futures
For those who are unaware of what a "future" is, it's basically a contract to buy , or sell an underlying asset (for example bitcoin) at a certain price. Why many professional traders prefer trading futures is because you can "short" and "long".
Longing: this essentially means you have a contract to buy an asset at a certain price, you will have a "positive" position and if the price goes up, you will make a profit since you have locked in your buy price. Alternatively, if it goes down you will lose money as your locked in price will be higher than the market price.
Shorting: this is the opposite of longing, where you have a contract to sell an asset at a certain price. This means you can make money on the markets even if you're bearish on the market overall. This can also help you "hedge" against other positions or crypto assets that have a positive correlation to the price of bitcoin, or market prices in general. This can help you decrease the risk in your portfolio and I will explain this concept in more depth in another article.
Delivery Date: all futures contracts have a delivery date (except for perpetual futures), which is when the shorters and longers settle their contracts by delivering the asset/commodity and the money, or closing their positions off in market. Typically, the price may differ between the futures and spot market before the delivery date, but it will normally converge to market price on the delivery date (I will explain this in more depth in another article).
Introduction to Perpetual Futures
Now that we have gone through the foundations of what a future is, we can now explore the logic of a "perpetual future".
These are basically designed to have no "Delivery Date" and can be held forever, or "perpetually". This eliminates the need to refresh your contracts every so often (typically quarterly).
The futures price and spot price may differ dramatically in the quarterly futures market, but the price of perpetual futures are kept similar to the spot price through a mechanism called the "funding fee". In short, this is a fee that the shorters pay the longers, or vice versa depending on the spot price compared to the futures price. I will go more in depth with this on another article.
That's it from me for now! Let me know if you have any questions about this article and I will try to answer them in the comments. Please also let me know if any information is wrong, I will gladly change anything in my article with sufficient proof of the contrary.