Futures fall under the category of financial derivatives which derive their value from an underlying asset. Consequently, cryptocurrency futures represent the value of a given cryptocurrency.
However, note that when buying a crypto futures contract, what you buy isn’t the underlying cryptocurrency but a contract speculating on its price performance. When entering a crypto future position, you agree to buy or sell the underlying cryptocurrency at a later date. (in the future 😉)
Instead of having to provide all the capital necessary to buy the underlying cryptocurrency immediately, when opening a futures position you only have to deposit a proportion of the market value. Therefore, futures are the perfect instrument for traders to hedge against existing positions without having to actually buy the underlying crypto.
Future prices are calculated based on the price the underlying asset is trading at on spot markets plus a futures premium. This premium can be negative which means that the future price is lower than spot and vice versa. A positive future premium means that the futures price is above the value of the spot price of the underlying. The future premium fluctuates with changes in demand and supply for futures products.
Position – a futures contract, created by a trader - equivalent to creating an order for spot trading).
Long position –when entering a long position, traders speculate that the price of an asset will go up. They effectively agree to buy a certain asset at the current price in the future. When the price actually goes up, traders make a profit.
Short position – The opposite to entering a long position is when traders short an asste. By doing so they bet that the price of the asset will go down in the future. When entering a short position traders enter a contract to sell the underlying in the future at a predefined price lower than the current spot price..
Classic and perpetual futures
Futures trading happens on different markets, therefore the price of futures tends to deviate from the base price of an asset on the spot market. This difference is known as the premium index (basis) Classic futures: This type of future has a set expiration date at which the trade is settled and the trader either has to buy or close the position by buying/selling. The premium usually decreases the closer the future expiration date comes. When the price of the future deviates from its fair price, traders can take advantage of appearing arbitrage opportunities. However, these tend to be balanced out by markets quickly.
Perpetual futures: Unlike classical futures, perpetual futures - also often just called perps by experienced traders - don’t have an expiration date. Therefore, traders can keep their positions open as long as they wish. To ensure that the positions are financially covered, exchanges deploy a funding mechanism. .The most essential element of the funding mechanism is setting the funding rate interest. The funding rate interest depends on the premium index (basis) and the interest rate which is calculated as the difference between rates of the base and quoted currencies and is usually fixed and very small). The funding rate is charged from positions that increase the basis will have to pay funding rate while positions that decreases the basis will receive funding rate. When the futures price is trading above the base active price the funding rate is set to a certain percentage that is paid by traders in long positions. The same percentage is given to traders in short positions. If the percentage was at 0.3% that’s the rate traders in long positions pay while short-sellers receive 0.3%. (This is just an example to illustrate the mechanism). This mechanism ensures that long positions are opened less frequently, preventing a further rise of the futures price. Simultaneously it encourages traders to enter or keep their short positions running as they can make small profits or turn short positions that are slightly in minus profitable as fundings cover losses. As a result, the price of the future gradually returns to the spot price. s. In total, the futures price gradually returns to the spot price.
When the futures price is trading below the base asset price the funding is paid by traders in short positions and traders in long positions receive the funding rate. In this scenario traders are encouraged to buy more futures, moving future prices closer to the base asset again. price to the base asset price.
Perpetual futures operation principles
The payments occurring between the short sellers and traders in long positions of a trade are called funding.
It is charged and paid at a configurable rate of frequency. At the time of writing(18.07.2021), the countdown used to calculate funding stands at 8 hours.
Whenever the countdown counter reaches 0 funding is executed, traders are charged or receive their funding rate. If traders enter their position right after the counter starts and it is realized (closed) prior to the counter reaching 0 they will not have to make a payment nor receive any funding.
The greater the difference between the futures and spot prices (funding rate), the higher the funding payments.
Funding = Mark Value * Funding Rate
(Mark Value = Market Price * Quantity)
The Funding Rate is calculated as:
Funding Rate = Average Premium Index + clamp (Average Interest Rate - Average Premium Index, - 0.05%, 0.05%)
clamp (x,a,b) = b (if b<x)
OR x (if a<x<b)
OR a (if x<a)
Premium Index and Interest Rate are calculated every minute in the funding interval. Average values for the calculation are taken for the following formula:
Premium Index = (max(0, Impact Bid Price - Mark Price) - max(0, Mark Price - Impact Ask Price)) / Mark Price + current Funding Rate
Interest Rate = (daily Quoted Currency Interest Rate - daily Base Currency Interest Rate)/ N
N - daily funding amount, i.e. 3 for 8 hours intervals.
If the Funding Rate is greater than 0, for example, -0.3, at the moment when the Countdown counter reaches 0, the size of the position (by Mark Value) will be multiplied by 0.3, and long positions will pay the resulting sums to short positions.
If the Funding Rate is less than 0, short positions pay for funding to the long positions.
In other words, the rate polarity (positive or negative) indicates the payment direction, and the number indicates the amount due for payment or receipt.
The funding is charged or paid to a certain contract.
Please note that funding is not associated with trades (or trade fees and rebates). Funding is directly settled between users and the exchange doesn’t receive a profit from these payments.
Futures market trading
Before trading, please deposit cryptocurrency into your Derivatives account.
1. Open the Account page.
2. Press the Transfer option in the respective currency line (or click the "3 dots" button and then Transfer).
3. A pop-up will appear. Select an account to transfer From (Spot or Wallet) and select the Derivatives account in the To drop-down menu. Enter the desired amount of collateral (margin) and press the Transfer button.
1. Go to the Futures tab.
You can see all available contracts in the Contracts widget.
2. Assign the currency amount, which will act as collateral for your contract.
For example, if you want to trade a BTC/USDT contract you would pick USDT. Click the Margin button at the top:
Fill in the fields on the Add margin tab:
Amount – the currency amount you want to use as collateral
Leverage (x1-x75) – the ratio of the trader's own funds to the funds required to open a position. Leverage is provided by the exchange and lets traders borrow funds from the exchange to increase the volume of their trade.
Press Transfer to continue.
3. Create a Long or Short order (as Buy or Sell order in the spot terminal):
The following data is calculated automatically:
Position – the desired currency amount to sell or buy (from the Amount field).
Buying power – the currency amount you can spend.
In orders – the currency amount reserved for current orders.
Best bid/ask – the best price for this side in the Market Depth.
Liq. Price – liquidation price. Once a currency pair price of the position reaches this value on the market your contract will be automatically liquidated (see the Liquidation paragraph below).
If the futures contract price is lower than the Liq. Price, a part of the margin collateral will be used to cover losses.
The following data is selected by the user:
Amount – how much you wish to sell or buy.
Price – the price for your trade.
%% indicator – enables to set the position volume as a percentage of Buying Power.
Total – the desired currency amount to receive or spend in the trade.
4. The newly created contract is now visible in the My orders and trades widget.
When checking the Show all contracts checkbox you can get an overview of all contracts
You can still change the contract Leverage after its creation by clicking the Margin button in the position line:
The contract has the following fields:
Contracts – contains the most important data (currency pair, leverage, Long/Short).
Position Size – the contract size in the currency youwant to buy or sell.
Entry price – the relevant currency pair volume-weighted average price in the futures market at the time of the contract's creation.
Price – liquidation price. When the currency pair price on the market reaches this value, the contract will be automatically liquidated (see the Liquidation paragraph below).
If the futures contract price is below the Liquidation Price, a portion of the margin collateral will be used to cover losses.
Risk – shows how close your position is to liquidation. The higher the selected leverage, the less volatility does the position tolerate and the faster a liquidation can happen if the position moves in an unfavorable direction (for the trader)
Unr. PnL (Unreleased Profit and Loss) –the profit or loss you would realize if you chose to close the position at that point in time. Closing the position by current market price can be done by clicking the close button.
PnL (Profit and Loss) – a real profit or loss of the contract when it was partially executed.
PnL = (Trade Price – Entry Price) * Quantity
ADL (Auto-Deleveraging) – a feature that covers the losses of some traders by automatically substituting with profit from other positions.
During Significant price movements, some traders' margins might not be sufficient to cover their losses.
This is when the ADL mechanism kicks in.
The indicator (from 0 to 4) shows how likely it is that the position will be used in the ADL procedure. So, if all indicator cells are active near the contract position, and there is a market situation when the liquidation loss cannot be covered, this contract will automatically be used to cover the losses on the opposite side.
Please not that this feature is used very rarely as it would result in negative feedback from users.
Margin – a margin collateral for this position.
5. You can find a list of completed trades under the My trades tab.
OHLCV chart features
OHCLV chart includes the following information indicators:
Mark price – the price used to decide on liquidation of a position. the mark price is compared with the liquidation price.
In our current implementation, the mark price is always equal to the last trade price on the spot market.
In the future, the mark price will be calculated based on the index price using the following formula
Mark Price = Index Price + Bfair
Bfair – "fair basis".
Bfair = Index Price * Funding Rate * (t/T)
t — the time remaining until the next funding period,
T — funding interval (8 hours)
Index – index price of the selected currency pair (the price on the spot market).
24 High/24 Low – max/min prices during that period.
Funding Rate – the rate for the funding calculation. The detailed calculation is noted above in the Perpetual futures operation principles
Countdown – the funding counter. When the value drops to zero, payments or deductions of funding will be made, and the counter will restart- currently set to 8 hours
Open int (Open interest) – the total currency volume in opened contracts on the market - regardless if short or long positions.
If the currency pair price on the market (Mark Price) is the same as Liq. Price for a certain contract, this contract will be liquidated - sold.
The system will always try to close the contract at the current market price.:
The margin collateral will be used to cover the loss.
Any surplus remaining after covering losses it will be returned to the user.
If the margin collateral doesn’t cover the loss, the position will be handed to the loss cannot BEA (internal platform mechanism).
If the BEA is unable to process the position, the ADL mechanism can be applied to the opposite market side.
The liquidation mechanism also takes potential funding and penalties into account. So, if the Funding Rate has increased, and a high Leverage is used, while the collateral doesn’t suffice to deduct funding, the position will be liquidated. Upon liquidation, a certain amount of penalty is debited from the user (0.5% of the position volume).
To avoid liquidation, you can either close the contract before liquidations occur or increase the margin collateral on your position:
Please note that the fees for futures trading are the following: taker = 0.08%, maker = 0.04%