What is Futures Contract?
Crypto Glossary Definition
A derivative product representing a legal agreement to buy or sell an asset at a predetermined price at a specified time in the future.
Why Futures Contract Matters
A futures contract lets traders speculate on a crypto asset's future price without owning the underlying coin, and is the vehicle most commonly used for leveraged trading. Crypto futures markets (especially perpetual futures) now regularly see far more trading volume than spot markets.
Futures Contract in Practice
A trader holding a large spot position in Bitcoin worries about a sharp price drop over an upcoming weekend, when exchange liquidity tends to thin out and she won't be watching the market as closely. Rather than selling her actual Bitcoin, which would trigger a taxable event and require her to buy back in later at a possibly higher price, she opens a short futures contract instead, effectively betting that the price will fall, sized to roughly offset the potential loss on her spot holdings. If Bitcoin's price does drop over the weekend, the loss on her spot position is largely offset by the gain on her short futures position, and she comes out roughly flat despite the price move. If the price rises instead, her spot position gains while the futures position loses, again leaving her close to flat, since the whole point was protection rather than speculation. Other traders use futures the opposite way, purely for leveraged speculation, opening large positions with a fraction of the capital that owning the equivalent amount of the underlying asset outright would require, which is part of why futures markets, especially perpetual futures with no expiration date, now regularly see far more daily trading volume than spot markets for the same assets.
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