Chapter 17 · Crypto Derivatives
Spot, dated futures, and perpetuals all say buy BTC. What differs?
- Skills to practice
- Understand marketsControl losses
- 3D simulation
- Risk room · Leverage(planned)
Market scene
Lin has $10,000 and expects BTC to rise next month. Searching BTC on the exchange returns three products and prices:
- BTC itself, at 60,000. What you buy is the quantity of coins you receive.
- A product expiring in 90 days, at 61,200: 1,200 above the first.
- A product without expiry, priced almost like the first. Small print says “0.01% · every 8 hours.”
The last two order screens have a slider from 1 to 20 or higher. At 20, you deposit only $10,000 but gains and losses follow $200,000 of BTC.
Lin remembers Zhe last week. Also bullish with $10,000, Zhe selected 20. Overnight BTC fell 5% within minutes, then recovered an hour later. Price returned, but his $10,000 did not: nothing remained.
Why does the same BTC have three prices? Why did recovery not restore Zhe's money?
Your decision
You have $10,000 and expect BTC to rise next month. How do you buy?
Observe the result
All four choices have the same bullish view but very different outcomes.
Three factors unrelated to direction determine them:
| Choice | Expiry | Holding charge | Decline causing liquidation |
|---|---|---|---|
| Direct purchase | None | None | None |
| 90-day product, $50,000 | Yes; initial 2% premium disappears by expiry | None | About 19.6% |
| No expiry, $50,000 | None | 0.01% every 8 hours; about $450 per month | About 19.6% |
| No expiry, $200,000 | None | About $1,800 per month | About 4.52% |
Correct direction is only the first step. With the same correct view, one trader profits, another pays substantial holding costs, and another is forced out before recovery. Zhe's view was not the problem; his implementation could not survive an ordinary fluctuation.
The mechanism
Deposit part of the money; take gains and losses on the whole exposure. Contracts need only collateral rather than the full $50,000 or $200,000. At $200,000 exposure on $10,000 collateral, a 1% drop costs $2,000, or 20% of collateral.
The exchange acts before collateral is exhausted. When only a small amount remains—here 0.5% of position value—it liquidates:
| Exposure | Liquidation price | Distance below entry |
|---|---|---|
| $20,000 (2×) | About 30,151 | 49.75% |
| $50,000 (5×) | About 48,241 | 19.60% |
| $100,000 (10×) | About 54,271 | 9.55% |
| $200,000 (20×) | About 57,286 | 4.52% |
Apply Zhe's overnight 5% fall and recovery to $10,000 capital:
| Exposure | Equity at the low | Equity after recovery |
|---|---|---|
| $10,000 (1×) | 9,500 | 10,000 |
| $20,000 (2×) | 9,000 | 10,000 |
| $50,000 (5×) | 7,500 | 10,000 |
| $100,000 (10×) | 5,000 | 10,000 |
| $200,000 (20×) | Liquidated | 0 |
Liquidation is irreversible: price returns; the position does not.
Why is the dated product dearer? Many people want bullish exposure with limited collateral and pay for it. The 90-day contract trades 2% above spot. At expiry it must equal the then-current price, so that 2% premium gradually disappears over 90 days. Buying it effectively prepays the 2%.
Others buy 1 BTC and sell one matching 90-day contract. Whether BTC ends at 50,000 or 80,000, the two legs offset and retain the $1,200 difference. These traders keep the premium from becoming excessive.
How does the no-expiry product stay near spot? Through the small print:
- Contract trades above spot
- Longs pay shorts every 8 hours
- Long exposure costs more; shorts receive a subsidy
- Fewer longs and more shorts
- Contract price returns near spot
0.01% sounds small, but three payments a day annualize to 10.95%. In a hot market, 0.05% annualizes to 54.75%. On $50,000 exposure, a month costs $2,250, or 22.5% of collateral.
What it is called
Directly buying or selling the asset: pay in full and receive coins. No expiry, liquidation, or holding charges. The first product is spot.
A contract settling at the market price on a future date. Its premium or discount to spot is the basis, which reaches zero at expiry. Here 2% over 90 days annualizes to about 8.11%.
A contract without expiry, using funding to keep price near spot. It is crypto's largest derivative category by trading volume.
Collateral deposited for a contract position. Equity below maintenance margin, a fraction of position value, triggers liquidation. Chapter 18 examines cascades.
Position value divided by margin. $200,000 exposure on $10,000 margin is 20×. Leverage magnifies price movement's account effect, rather than predictive accuracy.
A rate periodically settled between perpetual longs and shorts, commonly every 8 hours. Positive funding means longs pay shorts; negative means shorts pay longs. It is both a holding cost and a sentiment gauge.
Real markets
Traditional futures expire. In 2016 BitMEX introduced a BTC perpetual without expiry, using funding to anchor it to spot.
It made taking larger notional exposure very convenient, became crypto's largest product category, and is the main setting for the liquidation cascades in Chapter 18.
CME launched monthly, cash-settled Bitcoin futures in December 2017.
Buying spot and selling futures subsequently became an institutional way to participate in crypto: earn basis rather than bet on direction.
During strong rallies such as early 2021, perpetual funding remained high on many venues, and annualized futures basis sometimes reached double digits.
Leveraged bullish participants paid high persistent holding costs. Counterparties hedging shorts with spot collected that money steadily.
Hands-on
Below is Lin's $10,000.
Gray shows price; blue shows account equity; the orange dashed line shows the liquidation price.
Isolated-margin long with 0.5% maintenance margin; fees excluded. Funding assumes three settlements per day and constant position notional.
Course versionV1-docs; sourcelab:leverage；Chapter 17 / TRD-MICRO-005
Records parameters and results at the click only; does not mean the experiment passed.View snapshot to save
- Keep the flash crash at −5%. Select 1×, 2×, 5×, 10×, and 20×. Record equity at the low and after recovery.
- Select 10× and deepen the crash gradually from −5%. When does post-recovery equity become 0? Does it match the 9.55% liquidation distance?
- Select 5× and 30 holding days. Set funding to 0.01%, 0.05%, and −0.01%. What is paid or received, and what percentage of capital is it?
- On a public exchange page without logging in, simultaneously record BTC spot, a dated contract's price and expiry, and perpetual funding and next settlement time. Calculate basis and annualized basis; record timestamp.
Change one variable
The 10× position liquidates at the low, leaving 0 after recovery. The 5× position reaches $5,000 and recovers to $10,000.
Survival at a given leverage depends on the move's magnitude. You cannot know the next magnitude in advance.
Holding $50,000 exposure for 30 days costs $2,250, or 22.5% of $10,000 collateral. Annualized funding is 54.75%.
Even unchanged BTC loses you over a fifth of collateral. Hotter markets make bullish exposure dearer.
Whether BTC ends at 50,000, 60,000, or 80,000, the two legs offset and retain $1,200 per coin: 2%, or about 8.11% annualized.
This cash-and-carry trade earns the premium others pay for bullish exposure, rather than directional returns.
Three depths
- FoundationSpot, dated futures, and perpetuals all say buy BTC. What differs?Chapter 17
- AdvancedHow do Funding, OI, and Basis combine into Carry and positioning strategies?Advanced B · Strategy research
- InstitutionalHow should derivatives' Delta, margin, and financing enter portfolio risk?Institutional
- 3DStart with $10,000, select 1x, 2x, 5x, 10x, or 20x, then experience a −5% flash crash.Risk room
Ask three questions before selecting a product: does it expire, what does holding cost, and how far can price fall before liquidation?
Leverage magnifies fluctuation rather than accuracy: excessive leverage can force out a correct view during normal movement.
Turning Funding, OI, and Basis into strategies: funding and basis price bullish crowding; open interest measures the size of outstanding bets. Persistently high funding with rapidly increasing OI is a testable crowding signal. Collecting funding and basis is itself a Carry return source.
Define “high,” observation windows, and costs before testing. See Advanced B · Strategy research.
Continue the artifact: Test funding, basis, and financing assumptions separately.
Convert derivatives to exposure: institutions examine coin-equivalent directional exposure (Delta), margin used, and daily financing cost, then incorporate them into portfolio risk, rather than merely noting leverage multiples.
Venue rules are risks too: cross versus isolated margin, maintenance tiers, and auto-deleveraging in extremes alter the true risk of the same position.
Continue the artifact: Check two-leg financing and margin stress.
Questions to take away
Chapter self-test
The contract must equal then-current spot, so the premium gradually disappears over 90 days. A long prepays it. With 5× and $50,000 exposure, unchanged spot still loses about $980.
Funding makes longs pay shorts when the contract is above spot, making longs dearer and subsidizing shorts, pulling it back. Below spot, payments reverse.
20× places liquidation only 4.52% below entry. The 5% fall crosses that 4.52% line first. Liquidation is irreversible: price recovers, the position does not.
Three payments daily annualize to about 10.95%. Hot markets may reach 0.05%, or 54.75% annualized. A $50,000 position costs $450 to $2,250 monthly, 4.5% to 22.5% of $10,000 collateral.
One idea to take away
Derivatives require only part of the margin while exposing you to the full price risk. Leverage magnifies a given move's effect on equity.
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Spot, dated futures, and perpetuals all say buy BTC. What differs?
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