What are futures?

Imagine a coffee roaster who agrees today on the price of coffee to be delivered later. If coffee prices rise, they’ve locked in the agreed price. If prices fall, they’re still bound by the more expensive deal. That’s the basic logic of futures: the price is agreed now, while settlement happens in the future.

In crypto, the contract tracks the value of a coin such as Bitcoin. The buyer takes a long position, which benefits when the contract’s price rises, and the seller a short position, which benefits when it falls. The outcome also depends on the trading fees.

No Bitcoin needs to end up in your wallet. Depending on the terms, at expiry there is either physical delivery of the underlying asset or cash settlement, meaning the difference is paid in money. A position can also be closed before expiry with an offsetting trade.

Why it matters

Futures are used for speculation but also for hedging. Someone who holds Bitcoin can, for example, use a short position to limit the impact of a drop. That protection has a cost and isn’t necessarily perfect, since the contract’s price can differ from the price in the spot market.

The key distinction for us is that holding futures isn’t the same as holding crypto. You have a contractual position on the price, not necessarily coins you can transfer or use on the network.

What to watch out for

Futures often require margin, meaning collateral for the position, and allow leverage. So a relatively small market move can cause a large loss relative to your collateral. If it isn’t enough, the position may be liquidated before expiry.

On exchanges, you’ll also come across perpetual futures, which have no expiry date. They usually rely on periodic payments between longs and shorts, through the funding rate, to keep their price close to spot. They don’t work exactly like futures with an expiry, so their settlement terms, fees and liquidation rules need separate attention.