Trading futures contracts is a convenient way to predict the price of financial assets. When it comes to cryptocurrency trading, Binance Futures is one of the largest cryptocurrency futures exchanges. Binance provides us with a powerful trading engine that allows traders and hedgers to predict futures on many different cryptocurrencies within the platform. It also offers high leverage trading and a variety of mortgage deals to choose from.
Most of the products traded on Binance Futures are permanent futures contracts, which means that the contracts have no limited validity period. However, there are many ways to use futures contracts to predict the price of a financial instrument, one of which is delivery contracts.
In this article, we will discuss how delivery contracts work and what you need to know about trading on Binance.
If you would like to learn more about futures and forward contracts first, please read these introductory articles on futures.
A futures contract is an agreement to buy or sell an asset at a predetermined price at an agreed date in the future. This agreed date is also called the contract expiration date, which is the date when the contract is settled and the asset is delivered.
Binance futures contracts are settled in cash. What does this mean? Cash settlement means that the underlying asset will be delivered in monetary form. In the case of Binance futures contracts, that asset is BTC.
Binance’s delivery contracts expire on the last Friday of each quarter. For example, the BTCUSD 0925 contract will expire on the last Friday of the third quarter of 2020, September 25, 2020. This 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 much higher trading volumes than spot markets. We see this in the cryptocurrency market as well. Compared with the spot market, the futures market has larger trading volumes and is more liquid. Therefore, trading futures can be a good way to predict future price movements if a trader believes a particular asset will perform well.
The margin used for Binance’s delivery contract is BTC, the contract is also settled in BTC, and transaction fees are also paid in BTC.
Like Binance’s other products, delivery contracts follow a multi-tiered fee system. And, it has some additional features. For example, some tiers may offer discounted rates (or fee rebates) to market makers. This means that traders who are able to provide liquidity to the market will essentially reap the benefits.
If there are open positions at settlement, delivery fees must be paid. Please note that you cannot open a quarterly contract position in the 10 minutes before expiration. The settlement fee will be charged according to the rate table, which will be used as the taker fee corresponding to all positions settled on the delivery day.
The price change range of delivery contract products is US$0.10. This means that price changes in the contract occur in $0.10 increments. In comparison, Binance’s perpetual futures product has a minimum price movement of $0.01. You should pay close attention to margin requirements and ensure you adopt appropriate risk management.
It is worth noting that the higher the leverage you use, the smaller the maximum position size you can open. Do you want to know the simple position sizing formula? Learn how to calculate position size in trading.
In fact, we have basically understood the two The main difference between them is that delivery contracts have expiration dates, while perpetual contracts do not. But how else are they different?
Some futures contracts will automatically "roll over" to the next contract upon expiration. This means that when the current contract expires, open positions will actually be transferred to the next contract period. In fact, this is basically equivalent to how perpetual contracts work, these contracts do not operate on a quarterly cycle. However, this is not the case with Binance Futures contracts. When the expiration date comes, the delivery contract will be delivered at the average price of the last hour and settled with BTC as the instrument.
Contrary to the perpetual contract, the price index of the delivery contract is based on the BTC/USD market, not the BTC/USDT market. This allows traders to hedge against the risk of USD decoupling from the USDT exchange rate.
At the same time, the index price is composed of a moving average of the BTC/USD market price on the following exchanges: Bitstamp, Coinbase Pro, Kraken, Bittrex, and Binance. These markets are all equally weighted in the index. This index is used to calculate the actual price of liquidation. Not sure what the price tag is? See an introduction to this chapter in our Futures Guide.
Another major difference is the fee you pay. If you are trading perpetual contracts, you must pay a funding fee every 8 hours. This funding payment is made between market participants, bringing the perpetual contract market price close to the spot price. You might think of it as similar to an interest rate, but it is paid between traders.
When funding is positive, long positions pay short positions, and when funding is negative, short positions pay long positions. However, delivery contracts have no financing charges associated with them. This also makes them ideal for long-term holding, as funding charges and positions don't taper off over time. At the same time, if you want to trade short-term, perpetual contracts may be more suitable for you. It all depends on your risk tolerance and trading style.
If you want to learn more about perpetual contracts, check out What is a Perpetual Contract?
One of the advantages of Trading Futures on Binance is that you can use BTC as margin, and can be settled using BTC. This means you must also pay the initial security deposit in BTC.
Why are these the benefits of Binance? Using BTC allows large traders (whales) and even retail traders to hedge their BTC holdings. What will they do? For example, they can open a short position. If the price of BTC falls, they can use their BTC profits to offset USD losses. In other words, the USD value of BTC may fall, but they will have gained more Bitcoin by profiting from their short positions.
Also, these contracts are a great way to increase your Bitcoin holdings. Since they all use BTC for settlement, if you make a profit, you can effectively increase your Bitcoin holdings.
Binance Delivery Contracts can also open up great arbitrage opportunities for large traders. Let’s get an overview of how it works.
Here we need to understand two concepts first: Contango and Spot contango. Contango is when a futures contract trades at a higher price than the spot price of the underlying asset. Backwardation means that the trading price of futures contracts is lower than the price in the spot market.
In both cases, large institutional traders (such as whales or hedge funds) can profit from the difference between the spot price and the futures price, although the difference may be small. But they make profits by simultaneously buying futures contracts and selling spot assets, and vice versa. However, this often requires complex hedging and risk management strategies and is not recommended for beginners.
Come to Binance to buy Bitcoin and start your cryptocurrency journey.
Binance Futures enables traders to spend their Bitcoin to predict the prices of other financial assets. Delivery contracts are settled in BTC, which can be ideal for swing trading as there are no financing fees involved.
Futures trading can be a great way to speculate in the crypto market. If you want a more detailed guide, check out The Ultimate Guide to Binance Futures Trading.