Below are answers to the most frequently asked questions on the basics of futures trading:
Why should I trade futures?
Trading futures can be advantageous in a number of ways compared to trading the underlying asset directly:
- Futures allow benefiting from price increases as well as declines
- Futures provide financial leverage
- Futures can be used to hedge price risk
- Futures are associated with low transaction fees
However, trading futures, derivatives and other instruments using leverage involves an element of risk. The value of futures you enter into may fall as well as rise and you may get back less than your initial collateral, and in some cases you may lose your entire collateral balance.
What instruments do you list?
Futures come with a perpetual, monthly, quarterly and semiannual* maturity schedule and can utilise Single-Collateral or Multi-Collateral wallets with isolated or cross margin. We offer both inverse and linear contracts.
For detailed information on listed contracts, see:
*Semiannual contracts for FI_BTCUSD and FI_ETHUSD only
Note: The symbol XBT is used for Bitcoin for logs download and Futures API
What does inverse mean?
Inverse futures just mean that the payoff structure for your position is non-linear. The P&L is calculated so that the profit on the collateral you use matches the denomination of the contract as price adjusts.
For example, in Bitcoin-Dollar, because you are using Bitcoin as collateral and the contract is denominated in USD, as the price falls, the payout in Bitcoin has to be higher to match the Dollar value. This means that if the Bitcoin-Dollar price goes up 10% your payoff is 9.09% and if it goes down 10% your BTC payoff is 11.1%.
What does linear mean?
Linear futures have a payoff with a linear function, meaning that the price movement of the underlying asset has a direct correlation with the quoted value of the futures contract.
For example, with a Bitcoin-Dollar linear futures contract the profit or loss from a price increase or decrease is directly equal to the dollar increase or decrease of the contract itself. If you hold a long and the price increases by 10% your profit will be 10%, if you are short and the price goes down 10% your profit will be 10%
What does multi-collateral mean?
Multi-Collateral futures allow trading a wider variety of trading pairs with multiple assets as collateral. Similar to margin trading on Kraken’s spot exchange, your positions can be supported by cash, cryptocurrencies or stablecoins.
What does a typical trade look like?
Example Inverse Futures:
You believe that the price of Bitcoin will increase against USD and buy 100,000 Bitcoin-Dollar (PI_BTCUSD) futures at 35,000 USD per Bitcoin. Single-collateral inverse futures have a contract size of 1 USD. The price of Bitcoin actually increases and you are able to sell the Futures at 40,000. Your PnL is calculated as:
( 1 / Entry Price - 1 / Exit Price ) * Position Size
(1 / 35,000 - 1 / 40,000) * 100,000 = 0.3571428571 BTC
Example Linear Futures:
You believe that the price of Solana will increase against USD and buy 1,000 Solana-Dollar (PF_SOLUSD) futures at 85 SOL per USD. Multi-collateral linear futures have a contract size of 1 base unit, in this case 1 SOL. The price of Solana actually increases and you are able to sell the futures at 105. Your PnL is calculated as: ( Exit price - Entry price ) * Position Size (105 - 85) * 1,000 = 20,000 USD
Which maturity should I trade?
It depends on your trading objective. Our perpetual futures can be used for keeping long term positions open, without the need to roll your position and these contracts tend to have the greatest liquidity. There is a funding rate associated with these contracts, which can be positive or negative. These contracts are available for both single-collateral and multi-collateral. The fixed maturities (month, quarter, semiannual*) may better suit your needs for hedging purposes.
What happens if I hold a position until maturity?
Your position will be cash settled at a rate representing the underlying spot market.
Why do futures prices differ from the spot prices?
In mature financial markets, this price difference is determined by technical factors such as interest rate differentials, dividends or storage costs. In the case of Bitcoin and other digital assets, the price difference is mostly driven by supply and demand imbalances. For instance, bitcoin futures have often traded at a premium to the spot price in the past. This indicates that there is a high demand to buy Bitcoin on a leveraged basis.
Who is my counterparty?
If you offer to trade an instrument on the platform, this offer is matched by the trading system with another client's offer to take the other side of that trade. This means that Kraken Futures does not act as trade counterparty.
The respective venues where the contracts are listed have discretion over whether any offer to buy or sell is successfully accepted, matched or executed and it may choose at its discretion to refuse an order and such refusal is notified to you. This is to ensure that trades do not lead to market manipulation or other unfair circumstances.
Do closing orders require margin?
No. However, if there is open limit order(s) on your account that would close the position if executed, then it is seen as the only closing order(s), therefore any other order in the same contract will be seen by the trading engine as a new position, thus requiring margin when the order is submitted. See order types for details.
Can I hold a long and short position simultaneously in the same maturity?
No. While it is possible to have a long and a short position open simultaneously in different maturities, it is not the case for a long and a short position in the same maturity. For example, a long and short in PI_BTCUSD would not be possible simultaneously, but a long in the monthly and a short in the perpetual would be possible. If a trader had a long position of 20,000 contracts in PI_BTCUSD and attempted to enter a short position of the same size by executing a sell order of 20,000 contracts, then the long position would be closed upon execution of the sell order.
Can I leave positions before maturity?
Open positions can be exited before maturity by submitting a buy or sell order that closes the position (i.e. if you have a long position you sell, if you have a short position you buy back). The party with which you do the exit trade will then take over your obligations in relation with your original counterparty.
Do you have a "socialised loss" system, "claw-backs" or something similar?
If you buy, we match you with a seller and if you sell, we match you with a buyer. If you make a profit, this profit will come from other traders' losses on the platform. As a neutral exchange, we manage the margin of counterparties in real-time and transfer any profit and loss. If a liquidation can not be filled, it goes through an orderly unwinding process that attempts to first assign it to a market maker and then terminate to avoid system losses as last resort. Thus, the risk management system is designed to not sustain losses that would require schemes like "claw-back".
For help understanding futures terminology, see Futures Trading Glossary.
If you require further assistance with understanding the concepts and terminology of futures trading, contact us now. Our expert support team is always happy to help.