Ethereum Futures Guide
Learn the basic concepts of futures and compare exchanges that offer Ethereum futures contracts.
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A futures contract is a derivative product that creates an agreement between two parties to buy or sell an asset at a future date, for a set price. This allows traders to speculate on the future value of an asset, in this case Ethereum.
For instance, if you think the price of Ethereum is going to be worth more in a month's time, you can open a futures contract and go long. Whereas if you think the price will be less a month from now, you can open a contract and go short. You can also hold a perpetual futures contract, which does not have a set end date, and can be held open as long as you like – but you will have to pay periodic fees to do so (known as the funding rate).
Futures can also be used to hedge against unwanted price movements of the underlying asset (i.e. ETH) to help minimise any losses that would arise from holding that asset in your portfolio.
If you want to trade futures you will need to learn about things like reference price and leverage, as well as the risks involved which are discussed below, plus a list of exchanges you can trade Ethereum futures on.
Trade Ethereum futures on these exchanges
Use the table below to compare exchanges on things like supported currencies, deposit methods and fees.
A closer look at Ethereum futures contracts
Ethereum futures are financial instruments that allow you to take a long or short position regarding the price of ETH at a future date. So for example, if you go long on ETH and the market closes at or above the price dictated in the futures contract, you will make a profit. Alternatively, if you take a short position on ETH you can profit from a fall in the price.
Ethereum futures contracts get their value from their underlying asset – ETH – and are thus affected by changes in the price of ETH.
For some, futures trading is a good alternative to simply buying and selling digital currencies (spot trading) since the latter only allows users to accrue profits during bull markets, i.e. when the market is rising. On the other hand, futures contracts allow investors to speculate on an asset's negative price action as well, thus allowing for profits to be made during bear cycles.
How do Ethereum futures work?
As pointed out earlier, a futures contract is one where a buyer agrees to purchase – and the seller agrees to sell – an underlying asset (in this case, Ether) for a predetermined price on a date that has been set beforehand.
Alternatively, some futures contracts will track the price of ETH but be settled in dollars. In this case, instead of providing the buyer with ETH on the date of settlement, the seller has to pay the dollar difference between the contract price and the settlement price.
Similarly, if the settlement price in question is lower than the original contract price, the buyer is obliged to cover the difference and pay the seller for the same.
How is the value of a contract determined?
Though futures contracts are fairly simple in terms of their core design, a question that may arise in the minds of many is, how exactly is the value of these contracts tracked? The simple answer to this is, different platforms make use of different reference data sets.
For example, the Chicago Mercantile Group (CME), one of the largest derivatives exchanges in the world, makes use of real-time Ether price points aggregated from a wide range of prominent trading platforms such as Kraken, Coinbase, Bitstamp, etc.
The value of ETH collected from these different exchanges is made to undergo a volume-weighted average price (VWAP) standardisation every 24 hours following which the final value is used for settling all contracts.
As such, you should understand where the reference price comes from for a given contract or exchange to make sure it is a reputable and stable source. For instance, exchanges that are known to have flash crashes may cause your contract to get liquidated early.
What is leverage?
A common feature of futures contracts is leverage, which is sometimes referred to as margin.
Leverage allows traders to borrow funds in order to trade more assets than they actually have. For instance, trading with 10x amplifies your purchasing power by a factor of 10. Using leverage allows you to amplify your gains relative to your account size, but also carries with it a much higher risk if the market moves against you.
Case Study: Using leverage to trade Ethereum futures contracts
Michael has $100 in his trading account and is willing to use 50x leverage. What this means is that Michael has the ability to buy Ethereum futures worth $5,000 (i.e. 50 times his actual buying power). Assuming that the investor had acquired 200 lots – taking the contract size as 1ETH – of Ethereum futures at $25 and the price of the contract rose to $27.50, the individual stands to make a $500 profit, even though they originally had just $100 in their account.
Risks involved with Ethereum futures trading
Even though the option of leverage can be seen as one of the biggest advantages of the futures trading market, it can be a trap for novice users as it allows them to take positions that are well beyond their financial means (40-50 times over their actual balance) which can end up with their position – or entire account – being liquidated.
Furthermore, since Ether futures contracts, by and large, are driven by a high degree of speculation, it is possible for individuals to sustain heavy losses that can sometimes far outweigh their original capital. And even though the contracts in and of themselves are not risky, the danger lies in their design and utility.
Thus for individuals looking to deal with such massive leverage margins, it could be beneficial for them to learn financial management techniques such as stop-loss orders to curtail their potential losses.
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