Example of Crypto Futures Trading

In last two posts, I tried to cover some ideas and benefits of crypto future trading. Let me give a couple of examples today to make things clear to the newcomers of this sector.

Suppose a trader believes that the price of Bitcoin (BTC) will increase in the near future and decides to go long on a BTC futures contract. The current price of Bitcoin is $50,000, and the trader wants to enter a futures contract expiring in one month.

The futures contract has the following terms:

• Underlying Asset: Bitcoin (BTC)


• Contract Size: 1 BTC


• Expiration Date: One month from the entry date


• Futures Price: $55,000 per BTC

The trader decides to enter a long position by buying one BTC futures contract at the futures price of $55,000. Since each futures contract represents one BTC, the total contract value is $55,000.

Now, the trader only needs to deposit a fraction of the total contract value as a margin, known as the initial margin. Let the exchange require an initial margin of 10% for this futures contract. In this case, the trader needs to deposit $5,500 (10% of $55,000) as initial margin to enter the position.

source

So, let’s consider two scenarios at the expiration of the futures contract:

1. Bitcoin Price Increases:

If the price of Bitcoin rises to $60,000 at the expiration date, the futures contract is settled at the futures price of $55,000. Since the trader entered a long position, they make a profit equal to the difference between the futures price and the settlement price, multiplied by the contract size.

Profit = (Settlement Price - Futures Price) * Contract Size
= ($60,000 - $55,000) * 1 BTC
= $5,000

The trader's initial margin of $5,500 is returned, along with a profit of $5,000. The total return on investment is $10,500.

2. Bitcoin Price Decreases:

If the price of Bitcoin falls to $45,000 at the expiration date, the futures contract is settled at the futures price of $55,000. In this scenario, the trader incurs a loss equal to the difference between the futures price and the settlement price, multiplied by the contract size.

Loss = (Futures Price - Settlement Price) * Contract Size
= ($55,000 - $45,000) * 1 BTC
= $10,000

The trader's initial margin of $5,500 is used to cover a portion of the loss, resulting in a net loss of $4,500.

~ Regards,
VEIGO (Community Mod)