Bitget Beginner's Guide — What Are Futures?

Overview

- Futures trading is a high-risk, high-return product that allows you to leverage greater profits with less capital, but with the potential of greater losses. Understanding your risk tolerance before attempting to start trading will help you to better utilize futures products.

- This article is intended as a guide to help novice users better understand Bitget's futures products, introduce relevant terminology and concepts, and fully understand the characteristics of futures products and their potential risks and benefits.

- The article is divided into the following sections: What is futures trading, Futures trading types, How futures trading works, Pros and cons of futures trading, and Futures trading terms. If you already know all this, go to How to make your first futures trade to start your futures journey.

What is futures trading?

Futures trading is a type of financial derivative that, unlike spot trading, allows investors to make magnified profits by going short or utilizing leverage. Bitget Futures offers investors 200+ margin trading pairs with up to 125X in leverage. For example, when an investor believes that an asset's price is about to increase or decrease, they can go long or short on futures to take advantage of that asset's price movements. More importantly, no matter which position the investor takes, they can use leverage to magnify their returns.

Futures trading types

There are two main types of futures trading in the cryptocurrency space: USDT-M/USDC-M Futures and Coin-M Futures. Bitget offers USDT-M/USDC-M Futures, Coin-M Futures, and Delivery Futures. USDT-M/USDC-M Futures, also known as forward futures, refer to futures that are settled in stablecoins such as USDT and USDC. Examples of such futures are BTCUSDT and ETHUSDC (note that the quote currency is in the stablecoin). On the other hand, Coin-M Futures, also known as inverse futures, refer to futures that are settled in crypto, such as BTCUSD and ETHUSD. One point to note is that USDT-M/USDC-M Futures can also be referred to as USDT-M/USDC-M perpetual futures, which, as the name suggests, can be held in perpetuity. Coin-M Futures are divided into Coin-M perpetual futures and Coin-M delivery futures, the latter of which has a delivery period. Investors are advised to clearly distinguish the types of futures they are trading.

Many of these terms can be confusing for newcomers, but futures trading is very simple — you just need to remember the underlying asset, the settlement currency, and the expiration date. This applies to all futures contracts, be they perpetual, delivery, forward, or inverse. Take Bitget Futures as an example:

Differences	USDT-M/USDC-M Futures (forward futures)	Coin-M Futures Perpetual Futures (inverse futures)	Coin-M Futures Delivery Futures (inverse futures)
Quote currency	Usually stablecoins such as USDT and USDC	Uusally Bitcoin or other cryptocurrencies	Uusally Bitcoin or other cryptocurrencies
Notional value	In fiat	In crypto	In crypto
Expiration date	No	No	Yes
Suitable users	Newcomers	Newcomers	Experts

How futures trading works

The underlying logic behind futures trading is quite simple — it allows investors to borrow fiat or crypto to trade at a specific price at a specific point in the future.

Suppose that Investor A has 10,000 USDT in their account (their principal), and Investor A believes that Bitcoin is about to rise from its price of $50,000. Investor A borrows 90,000 USDT from Bitget and then uses their 100,000 USDT to buy 2 Bitcoin futures contracts. If the price of Bitcoin rises to $60,000 the next day, then Investor A can either continue to hold their position or sell/close both futures contracts. After selling/closing their position, Investor A has 120,000 USDT in their account. After paying back 90,000 USDT to Bitget, Investor A has 30,000 USDT remaining in their account. After deducting the principal of 10,000 USDT, Investor A's profit is 20,000 USDT.

There are a few variables to note here:

1. Investor A can adjust the amount they borrow (their leverage) according to their risk tolerance.

2. Investor A can just as easily buy/go long as they can sell/go short.

3. After Investor A makes a profit, they can choose to keep holding, add to their position, close their position, or sell off a part of their position.

4. If the price of Bitcoin decreases after Investor A opens their position, then Investor A may need to add funds to their account to prevent liquidation.

In effect, futures trading is an exchange lending money to investors to magnify their gains at the risk of amplifying their losses. Leverage is the biggest feature of futures trading as it allows investors to magnify their gains without having to invest 100% of the position's value as principal.

Pros and cons of futures trading

As leverage is the biggest feature of futures trading, its pros and cons are quite clear. In layman's terms, investors have the chance to make massive gains in a day, but they are also at risk of losing everything all at once.

Pros:

- Huge gains with small investments

In futures trading, investors can leverage small amounts of capital into large profits. At present, the maximum leverage offered by major exchanges is 125X, which means that investors can magnify their earnings by as much as 125 times their capital. While futures trading improve asset utilization, it is important to note: high leverage is not suited for new traders as it increases the risk of liquidation.

- Rapid profits

When compared to spot trading, futures trading allows investors to profit much quicker. Measured at an average of 10% per increase, it would take 7 increases to double a spot trade of $10,000 in principal. On the other hand, a trade at 10X leverage would double the principal in a single increase of the same amount (profit = $10,000 × 10 × 10% = $10,000).

- Option to go short

Crypto is a typical short-bull, long-bear market, meaning that entry timing is critical for investors. While it is easy to profit just by buying during bull markets, but profiting via spot trading becomes challenging during bear markets. Futures trading offers investors another option — going short, which allows them to profit from downward market trends.

- Hedge against downside risk

Hedging is an advanced trading strategy used by experienced investors and miners. As investors' spot holdings decrease in value during bearish markets, they can hedge against this risk by opening short positions, which will rise in value as the price of the underlying asset falls.

Cons:

- Liquidation risk

There's no certain way to quickly make huge profits. While futures trading does magnify gains, it also carries a high risk of losing money. One of the biggest risks is liquidation, which is when an investor opens a futures position but does not have sufficient funds to maintain the position when the price moves against them. Simply put, when the negative price movement multiplied by the leverage exceeds 100%, the entire investment will be lost.

Suppose that Investor A goes long on BTC at 50X leverage. If the price of BTC falls by 2% (50 × 2% = 100%), Investor A's principal will be completely lost. Even if the price rises after 5 minutes, the damage would already be done. The same principle applies to short positions. If Investor A goes short on BTC at 20X leverage, then their position will be liquidated if the price rises by 5%.

Liquidation is the biggest risk in futures trading. Many investors who are just starting out with futures trading don't have a good understanding of leverage and fail to realize that the potential losses can be just as great as the potential gains. For information on how to avoid liquidation, control risks, and keep your principal secure, refer to How to avoid liquidation.

- Quick reversal

Quick reversals were a common trend in the early years of futures trading. They occur when candlesticks on the chart suddenly move downward and then back upward (or the other way around), signaling a big fluctuation followed by a quick stabilization. These events have no effect on spot traders but pose great risks to futures traders. Since leverage magnifies all price movements, if Investor A opens a long position at 100X leverage and the price drops by 1%, their position will immediately be liquidated. Even if the price then goes on to increase by 1000X, they won't reap any of the profits. This is why positions are liquidated even when the current price is the same as the entry price. When the price fluctuates against the position, there is a risk of immediate liquidation.

Futures trading terms

Insurance fund: The pool of funds used to absorb collateral shortfalls and decrease the possibility of auto-deleveraging (ADL) occurring on the platform. Insurance fund = value of positions ÷ leverage.

Maintenance margin: The minimum margin required to continue holding a position. The maintenance margin will be increased or decreased based on the risk limit of the trader.

Maintenance margin rate: The margin amount corresponding to the position size tier. When the margin rate of a position falls below the maintenance margin rate, a partial or full liquidation will be triggered.

Margin ratio: Measures the risk of a user's current position. When it reaches 100%, liquidation or partial liquidation will be triggered. Margin ratio = current position's maintenance margin ÷ (account equity – amount frozen for orders under isolated margin mode – unrealized PnL of the isolated margin position – isolated margin for the position).

Isolated margin: A certain amount of margin is allocated to each position. If the margin of a position falls below the maintenance margin, a liquidation is triggered. You can add margin to or remove margin from a position in this mode.

Cross margin: All available balances in the account can be used as margin to avoid the liquidation of a position.

Cross margin mode: A margin mode that utilizes the available balance of a trader's account as the margin for open positions.

Isolated margin mode: A margin mode that isolates the margin placed into an open position from the trader's account balance.

Mark price: The global spot index price plus a decaying funding basis rate.

Mark price to liquidation price (spread): The spread between the order's estimated liquidation price and current mark price. This allows traders to check the spread and assess the risk of immediate liquidation before confirming the order placement.

Position margin: Initial margin + transaction fees required to close the position.

Initial margin: The margin required to open a position for margin trading.

Liquidation: Refers to when a position's margin falls below the maintenance margin requirements, causing the complete loss of the entire margin collateral. Triggered when the mark price reaches the liquidation price of the position.

Market close: A close on trigger order placed at the market price.

Market order: An order executed immediately at the current best available market price in the order book.

Market price-based order placing: The system selects the price most likely to be filled to place an order. If the order is not filled or not fully filled, the system continues to place the next order at the latest price that is most likely to be filled.

Trading bonus: Users can use trading bonuses for trades within a volume range or invest them in certain products but cannot withdraw or transfer them to other accounts.

Order margin: The sum of all margins for active orders that are pending execution.

Unrealized PnL: The estimated profit and loss of a position based on the current market price. Does not include transaction or funding fees.

Limit order: An order placed in the order book with a specific price limit. The user is the one who sets the price limit. The order is only executed when the market price reaches, or is better than, the current bid/ask price. Limit orders help users buy low or sell at a price higher than the current market price. Unlike a market order, which executes immediately at the current market price, a limit order is placed in the order book and only triggered when the price is reached.

Trailing TP/SL: A special instruction that allows users to place a pre-defined order when the market moves against/in favor of their trade. When the market price/mark price reaches the highest/lowest price × (1 ± trail variance), the order will be placed at the best market price.

These are some of the common terms and futures in contract trading. For more information, refer to Explanation of futures trading terms and usage scenarios.