This section outlines key differences between Spot trading and Futures trading, and introduces basic concepts to help you read deeper into futures contract.
In a futures market, prices on the exchange are not ‘settled’ instantly, unlike in a traditional spot market. Instead, two counterparties will make a trade on the contract, with settlement on a future date (when the position is liquidated).
Important note: Due to how the futures market calculates unrealized profit and loss, a futures market does not allow traders to directly buy or sell the commodity; instead, they are buying a contract representation of the commodity, which will be settled in the future.
To open a new trade in a futures exchange, there will be margin checks against collateral. There are two types of margin:
Initial Margin: In order to open a new position, your collateral needs to be greater than the Initial Margin.
Maintenance Margin: If your collateral + unrealized profit and loss fall below your maintenance margin, you will be auto liquidated. This results in penalties and additional fees. You can liquidate yourself before this point to avoid being auto liquidated.
Due to leverage, it is possible to hedge out spot or holding risk with relatively small capital outlays in the futures market. For example, if you are holding 1000 USDT worth of BTC, you can deposit a much smaller (50 USDT) collateral into the futures market, and short 1000 USDT of BTC to fully hedge out the positional risk.
Note that futures prices are different from spot market prices, because of carrying costs and carrying return. Like many futures markets, uses a system to encourage the futures market to converge to the ‘mark price’ via funding rates. While this will encourage long-term convergence of prices between spot and futures for the BTC/USDT contract, in the short term there may be periods of relatively large price differences.
The premier futures market, Chicago Mercantile Exchange Group (CME Group), provides a traditional futures contract. But modern exchanges are moving toward the perpetual contract model.