Introduction
Trading futures is a convenient way to speculate on the price of a financial asset. Binance Futures is one of the largest futures exchanges for trading cryptocurrencies. Binance offers a robust trading engine that allows traders and hedgers to speculate on many different cryptocurrencies. It also offers high leverage trading and multiple collateral options.
Most futures contracts listed on Binance Futures are perpetual futures contracts, which means these contracts do not have an expiration date. However, there are many ways to speculate on the price of financial instruments using futures contracts, and quarterly futures contracts are one of them.
In this article, we'll look at how quarterly futures work and what you need to know if you want to trade them on Binance.
If you want to learn more about futures and forward contracts, check out our article about them.
What is a quarterly futures contract?
A futures contract is an agreement to buy or sell assets at a predetermined price on a future date. This date is called expiration, which is the date when contracts are settled and assets are delivered.
Binance quarterly futures contracts are settled in cash. What does that mean ? Cash settlement simply means that the underlying asset is delivered in the form of currencies. In the case of Binance Quarterly Futures, that asset is BTC.
Quarterly futures contracts on Binance expire on the last Friday of each quarter. For example, the BTCUSD 0925 contract will expire on the last Friday of 2020 of Q3 2020, i.e. September 25, 2020. This date can also be called the delivery date, as this is when the underlying asset (BTC) is delivered .
In traditional financial markets such as the stock market, derivatives attract significantly higher trading volume than in spot markets. We also see this in the cryptocurrency markets. There is greater volume and deeper liquidity in the futures markets, compared to the spot markets. So, if traders think a particular asset is going to perform well, futures trading can be a great way to speculate on future price movements.
How do quarterly futures work?
The margin used for Binance Quarterly Futures is BTC, contracts are settled in BTC, and trading fees are also paid in BTC.
Just like other Binance products, quarterly futures contracts follow a multi-tiered fee system. However, there is an added benefit. Some tiers also offer negative fees (or discounts) for makers. This means that traders who provide liquidity to the market are compensated.
If you have an open position at expiration, you will have to pay a delivery fee. Please note that you will not be able to open quarterly futures positions 10 minutes before expiration. Settlement fees are calculated according to the fee schedule and will be charged as a taker fee for all positions paid upon delivery.
The tick size on quarterly futures products is $0.10. This means that price changes in the contract are in increments of $0.10. Conversely, the tick size of Binance perpetual futures is $0.01. You also need to be extremely careful about liquidation. Closely monitor maintenance margin requirements and ensure you are exercising appropriate risk management.
It is also worth noting that the higher the leverage, the smaller the maximum position size you can open. Want to know a simple formula for position sizing? See How to Calculate a Trading Position Size.
Quarterly Futures and Perpetual Futures, What is the Difference?
We already know the main difference: quarterly futures contracts expire, which is not the case for perpetual futures contracts. But what are the other differences?
Some futures contracts will automatically roll over to the next contract upon expiration. This means that when the current contract expires, the open positions are transferred to the next contract. In fact, this is essentially how perpetual futures work, just not on a quarterly basis. However, this is not the case with Binance Quarterly Futures. Once the expiration date arrives, quarterly contracts expire at the last hour's average price and are settled in BTC.
Unlike perpetual futures, the quarterly futures price index is based on the BTC/USD market, not the BTC/USDT market. This allows traders to hedge against the risk of USDT decoupling from USD.
The index price is made up of a moving average of the BTC/USD market price on the following exchanges: Bitstamp, Coinbase Pro, Kraken, Bittrex and Binance. These markets all have equal weighting in the index. This index makes it possible to calculate the benchmark price, which is used for liquidations. Don't know what the reference price is? Consult the chapter dedicated to it in our guide to futures contracts.
Another key difference concerns the fees you will have to pay. If you trade perpetual futures, you will have to pay funding fees every 8 hours. These funding fees are paid between market participants to keep the perpetual price of futures contracts close to the spot price. You can think of it as something similar to the interest rate, but it is paid between traders.
When funding is positive, long positions pay short positions, when funding is negative, short positions pay long positions. However, quarterly futures contracts do not come with funding fees. They are therefore ideal for long-term holding, as financing fees will not gradually reduce the position in small chunks over time. At the same time, perpetual futures contracts may be more suitable if you want to trade in the short term. It all depends on your risk profile and trading style.
If you want to learn more about perpetual futures, check out the article What are perpetual futures?.
The Benefits of Trading Binance Quarterly Futures
An advantage of Binance Quarterly Futures is that you can use BTC as margin and they are settled in BTC. This means that you must commit your initial margin in BTC.
Why is this an advantage? The use of BTC allows traders placing large orders (whales) or even individuals to hedge their BTC positions. How would they do that? For example, they can open a short position. If the price of BTC declines, they can offset their USD losses with their BTC gains. In other words, the USD value of BTC may go down, but they would get more BTC by taking advantage of the short position.
Additionally, these contracts are a great way to easily increase your BTC holdings. Since they are settled in BTC, winnings can increase your BTC balance in the long term.
Binance’s quarterly futures contracts can also open up favorable arbitrage opportunities for large traders. Let's see how it works.
There are two concepts we need to understand here: contango and backwardation. Contango is when futures contracts trade higher than the spot price of the underlying asset. A backwardation occurs when futures contracts trade at a lower level than the spot market.
In both cases, large traders (like whales or hedge funds) can profit from the difference between the spot price and the futures price, even if it is very small. They do this by buying futures contracts and selling spot positions at the same time, or vice versa. However, this usually requires complex hedging and risk management strategies and is not recommended for novice traders.
To conclude
Binance quarterly futures contracts allow traders to speculate on the price of a financial asset using their bitcoins. Quarterly futures contracts are settled in BTC and can be ideal for short-term trading because they have no funding fees.
Futures trading can be a great way to speculate on the crypto markets. If you want to read a complete guide on this, check out The Ultimate Guide to Binance Futures Trading.
