Many people have asked me, "What are futures contracts, and what does 'liquidation' mean?" There's a common belief that futures trading allows you to "profit big with small capital," but it also carries high risks for average participants. Is this true?
Given the recent high volatility in cryptocurrency prices, many of my friends have received notifications about "futures liquidations" from trading apps—for example: "24-hour新增爆仓1.31万个BTC" or "某交易平台出现大额爆仓单，请控制风险."
Since futures contracts involve complex concepts, I’ll break this down into three articles to help you fully understand:
- What are futures contracts, and what is their primary purpose?
- How do margin systems, leverage ratios, and liquidations work?
- What happens during extreme market conditions (e.g., "穿仓"), and how are losses covered?
Today, let’s focus on the basics: What is a futures contract, and why does it exist?
Spot Trading vs. Futures Trading
Spot trading refers to immediate transactions where you exchange money for assets (e.g., buying/selling tokens on an exchange). In contrast, futures trading involves agreements to buy or sell assets at a future date—hence the name "futures."
Example: Hedging with Futures
Imagine Zhang, a Bitcoin miner, produces 10 BTC monthly. With BTC prices soaring, Zhang worries the price might drop before June. His friend Li, however, believes prices will rise. They agree to sell 10 BTC on June 30 at today’s price (¥54,000).
Key takeaways:
- This is a futures trade with a predefined delivery time, delivery price, and underlying asset (BTC).
- Since Zhang must deliver actual BTC, this is a physical settlement.
But futures can also use cash settlements (e.g., CME’s Bitcoin Index futures), where traders settle price differences without handling physical assets.
Standardized Futures Contracts
A futures contract formalizes such agreements. Exchanges standardize these contracts to:
- Match buyers/sellers (e.g., Zhang and Li).
- Ensure enforcement upon expiration (delivery).
Traders often buy/sell contracts before expiration without holding them to delivery—this is "contract trading."
Purposes of Futures Contracts
Hedging Risk (套期保值)
- Example: Zhang locks in profits to offset potential price drops.
Leverage (以小博大)
- Amplifies gains and losses (more on this in Part 2).
FAQs
Q: Why do most retail investors lose money in futures?
A: High leverage magnifies small price swings, triggering liquidations. Emotional trading and lack of risk management exacerbate losses.
Q: Is cash-settled futures trading just gambling?
A: While some argue it’s speculative, institutions use it for legitimate hedging. Retail traders often misuse it for short-term bets.
Q: How can I reduce futures trading risks?
A: Use lower leverage, set stop-loss orders, and avoid overexposure in volatile markets.
👉 For secure trading practices, check out this advanced guide.
Next, we’ll explore margin systems and liquidation mechanisms. Stay tuned!
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