A futures contract is a standardized agreement that requires two parties to buy or sell an asset at a fixed price on a set future date. In crypto and traditional markets, futures contracts help traders manage risk, speculate on price movements, and gain exposure without directly owning the underlying asset.

These contracts define the asset, the size of the position, and the settlement date. Once the contract expires, the buyer and seller must complete the transaction at the agreed price — either through physical delivery or cash settlement.

How Futures Contracts Work

Futures contracts are traded on regulated exchanges, which means their terms are standardized. This makes them more transparent and easier to trade than private forward agreements.

Traders can close or modify their positions before the contract expires using three common methods:

Offsetting
Closing an existing position by opening an equal and opposite trade.

Rolling Over
Traders who want to maintain exposure open a new futures contract with a later expiration date and close the previous one.

Settlement
When the contract reaches its expiration date, settlement occurs. Some futures settle through physical delivery of the asset, while others use cash settlement based on market price — common in cryptocurrency futures.

Futures vs. Other Derivatives

A futures contract differs from:

Options – Options give the right, but not the obligation, to buy or sell an asset. Futures require execution.
Forwards – Forwards are private agreements that can be customized, while futures are standardized and traded on exchanges.

What Assets Use Futures Contracts?

Futures exist across many markets:

• Stocks and equity indexes

• Fiat currencies

• Government bonds

• Commodities like oil, gold, and agricultural goods

• Cryptocurrencies such as Bitcoin and Ethereum

In crypto, futures allow traders to speculate on price changes using leverage, hedge spot positions, or manage long-term exposure.

Why Traders Use Futures Contracts

Futures contracts offer several advantages:

• Risk hedging against volatility

• Leverage for amplifying exposure

• Liquidity, since futures markets attract large institutional volume

• Price discovery, helping markets find fair value

Traders typically combine technical analysis and fundamental analysis to interpret futures market trends and manage their positions effectively.

Conclusion

A futures contract is a powerful tool in crypto and traditional finance, offering traders a way to speculate, hedge risk, and participate in markets without directly owning the underlying asset. Understanding how futures work from settlement types to rollover strategies is essential for anyone navigating the derivatives landscape.