With the expanding scale of the digital currency market, led by Bitcoin, diverse derivative trading instruments have emerged beyond spot trading. These tools serve as effective methods for hedging risk, with contract trading being one of the most prominent.
What Is Contract Trading?
Contracts are among the most common forms of derivative trading in the digital asset space. Digital asset contract trading refers to an agreement between buyers and sellers to trade a specific asset at a predetermined price at a future date.
This allows investors to profit not only from rising prices in spot trading but also from price fluctuations of the underlying asset through long (buy) or short (sell) contract positions. For example, going long on BTC when expecting a price increase brings profit if the price rises, and loss if it falls. Conversely, going short on BTC when anticipating a drop yields profit if the price falls and loss if it rises. Thus, even during market downturns, there are opportunities to gain through contract trading.
Additionally, contract trading enables risk avoidance via hedging strategies and provides avenues for earning steady profits through arbitrage models.
Beyond enabling two-way trading (long and short), another key feature of contract trading is leverage, which multiplies the trader’s capital. Leverage amplifies both potential returns and risks, making contract trading a higher-risk investment activity compared to spot trading. New users should fully understand the basics and exercise caution to manage risks effectively.
Types of Contract Trading
Major platforms offer two primary types of contract products: perpetual contracts and delivery contracts, differentiated by the presence or absence of a settlement date.
These can be further categorized based on margin type into coin-margined contracts and U-margined contracts. The latter includes USDT-margined and USDC-margined contracts.
Delivery Contracts
Delivery contracts have a fixed settlement date. The parties agree to buy or sell the contract at a specified price on the delivery date. If the contract remains open at expiration, it is settled automatically based on the arithmetic average of the index price during the last hour, regardless of profit or loss. Common delivery cycles include weekly, bi-weekly, quarterly, and bi-quarterly contracts.
Perpetual Contracts
Perpetual contracts lack an expiration date. To keep the contract price aligned with the spot price, a funding fee mechanism is employed.
Funding fees are calculated as:
Position Value × Current Funding Rate
(The funding rate is determined by the price difference between the contract and the spot index in the previous funding period.)
A positive funding rate means long positions pay short positions; a negative rate means shorts pay longs. These fees are exchanged between users, not paid to the platform.
Settlement typically occurs every eight hours. Only users holding positions at settlement times pay or receive funding fees. Closing a position before settlement exempts traders from funding payments.
Coin-Margined Contracts
In coin-margined contracts, the underlying asset (e.g., BTC or ETH) serves as both margin and settlement currency. The contract is priced against a USD index (e.g., BTCUSD), with a fixed face value—for instance, 100 USD for BTC contracts and 10 USD for other cryptocurrencies.
This contract type allows hedging of existing holdings and enables traders to benefit from both the asset’s appreciation and contract gains when holding long positions.
U-Margined Contracts
U-margined contracts use stablecoins like USDT or USDC as collateral and for settlement. Traders can use a single USDT or USDC balance to trade multiple contracts, with all profits and losses settled in the stablecoin.
These contracts reference a USDT or USDC index (e.g., BTCUSDT) and have face values denominated in the crypto asset, such as 0.001 BTC for Bitcoin contracts.
This model offers flexibility in margin allocation across positions and eliminates concerns about the depreciation of the held cryptocurrency. It also simplifies profit and loss calculations.
How Does Contract Trading Work?
1. Select Contract Type
Based on their market outlook, traders decide whether to go long or short and choose between perpetual or delivery contracts.
Weekly contracts settle on the nearest Friday, bi-weekly on the second Friday, and quarterly contracts settle on the last Friday of March, June, September, or December—whichever is closest without overlapping with other contract dates.
2. Choose Margin Mode
When setting up a contract trading account, select a margin mode. Different modes have distinct margin calculations and risk control mechanisms. Note: Margin modes can only be changed with no open positions or orders.
- Cross Margin: All positions share the same margin balance. The account must maintain a margin ratio of at least 100% after opening a position.
- Isolated Margin: Each position’s margin is calculated separately. Orders require sufficient isolated margin for the specific contract.
3. Set Parameters
Choose an order type—limit, market, or others—and enter price, quantity, or amount based on market data like chart analysis.
The required margin for an order equals the contract value divided by the leverage multiplier. Orders execute only if account equity meets or exceeds the margin requirement.
4. Holding Positions
After order execution, the trader holds a long or short position.
5. Adjusting Positions
Traders can modify positions based on market conditions—closing to lock in profits or cut losses, or adding to positions to maximize gains.
6. Settlement
On the delivery date, open delivery contracts are settled automatically at the settlement price. Profits or losses are recorded as realized P&L.
Perpetual contracts can be closed anytime without a fixed settlement date.
After settlement, realized P&L is transferred to the account balance. Users can review this in their asset section.
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Frequently Asked Questions
What is the main difference between perpetual and delivery contracts?
Perpetual contracts have no expiry and use funding fees to track spot prices, while delivery contracts settle at a future date based on a fixed price mechanism.
How does leverage work in contract trading?
Leverage allows traders to open larger positions with less capital. For example, 10x leverage lets you control a $10,000 position with $1,000. While it magnifies profits, it also increases potential losses.
What are funding fees in perpetual contracts?
Funding fees are periodic payments between traders to align perpetual contract prices with spot market levels. Rates vary based on market conditions and are paid every 8 hours.
Can I switch margin modes after opening a position?
No. Margin modes can only be changed when no positions are open and no orders are pending.
Is contract trading riskier than spot trading?
Yes. Due to leverage and market volatility, contract trading carries higher risks. It requires experience and risk management skills to avoid significant losses.
Do I need to hold the underlying asset to trade coin-margined contracts?
Yes. Coin-margined contracts require the base currency as collateral. For instance, a BTC-margined contract demands BTC as margin.
Risk Disclaimer: Digital currency trading involves high risks, with prices subject to sharp fluctuations and potential loss of value. Derivative trading, with its inherent leverage, is especially risky and suited only for experienced investors or professional institutions. Assess your financial situation and risk tolerance carefully before participating.
This article provides general information only and does not constitute investment, legal, or financial advice. Product offerings may not be available in all regions. Always consult a qualified professional for personalized guidance.