What are crypto futures and leverage?

Crypto futures are contracts that let traders bet on a coin's future price without owning the coin. Leverage means trading with borrowed money, so a small deposit controls a much larger position. Together they magnify gains and losses, and they are the main reason trading accounts are wiped out.

What is a crypto futures contract?

A futures contract is an agreement to buy or sell an asset at a set price on a future date. Most crypto futures settle in cash, so no coins change hands. Only the profit or loss does.

A trader who expects the price to rise goes "long." One who expects a fall goes "short." Traditional futures have an expiry date and trade on regulated venues such as CME Group in Chicago. Miners and funds use them to hedge, meaning to protect against price moves. Many others use them to speculate.

What is a perpetual future?

A perpetual future, or "perp," is a futures contract with no expiry date. It is the most heavily traded product on many crypto exchanges.

Because the contract never settles, something else has to keep its price close to the ordinary market price. That mechanism is the funding rate, a regular payment between traders. When the contract trades above the market price, longs pay shorts. When it trades below, shorts pay longs. Holding a position can therefore cost money even if the price stands still.

How do margin and liquidation work?

Margin is the deposit a trader puts up as collateral. With 10 times leverage, written 10x, $100 of margin controls a $1,000 position. A 10% rise in the price doubles the trader's money. A 10% fall wipes it out.

Before losses exceed the deposit, the exchange closes the position by force. This is liquidation. The trader loses the margin and usually pays a fee as well. The higher the leverage, the smaller the move needed: at 50x, a 2% move against the position is enough. Crypto prices often move that much in a day, as the guide to volatility explains.

Why does leverage wipe out accounts?

In spot trading, a holder who sits through a fall still owns the coins and can wait. A leveraged trader who is liquidated is out, even if the price recovers an hour later.

Liquidations also feed on each other. Forced selling pushes the price down, which triggers more liquidations, a chain reaction behind many sudden crashes. And because crypto trades around the clock, this can happen while a trader is asleep.

The Commodity Futures Trading Commission, the US derivatives regulator, warns in a customer advisory that leveraged futures amplify the risks of trading and that customers may lose more than their initial investment. Rules on who may trade these products, and with how much leverage, differ by country. Platforms offering very high leverage often operate outside the main regulated markets.