Forward and Futures Contracts: A Beginner’s Guide

The first time many people come into contact with the word "futures" is when they see "perpetual contracts" or "U-based contracts" on cryptocurrency exchanges. But futures are actually a very old tool, predating Bitcoin by decades. It is a relative of a forward contract, which agrees to buy or sell an asset at a certain price at a certain time in the future. The difference is that one goes "privately" and the other goes "public."

A forward contract is an agreement signed privately between two people. For example, a foreign trade company has to pay U.S. dollars to overseas suppliers in three months. It is worried about the depreciation of the RMB, so it asks a bank to sign a forward to lock the exchange rate. The terms are completely negotiable: how much to buy, when to deliver, and what price are all negotiable. But here’s the problem: If the other party defaults on the bill, you can only file a lawsuit, and there is no third party to hold you accountable. This is called counterparty risk.

Futures contracts resolve this risk. It is a standardized contract traded on a regular exchange. The exchange stipulates the size, expiration date, and settlement method of each contract, and everyone follows the rules. The most critical thing is that the exchange’s clearing house will stand in the middle of every transaction, acting as the buyer’s seller and the seller’s buyer. Even if one party liquidates its position and runs away, the clearing house will ensure that the other party gets the money it deserves. Therefore, the counterparty risk of futures is much smaller than that of forwards.

Futures also have another feature: profit and loss are settled every day, which is called "marking to market on a daily basis." For example, if you buy a Bitcoin futures contract and the price rises that day, the clearing house will transfer the profit to your margin account; if it falls, the money will be deducted. In this way, losses will not occur until the expiration date, and the exchange can control risks in real time.

Because futures are publicly traded on exchanges, they are much more liquid than forwards. Most people who trade futures don't want to actually get the goods at all. They will close the position before expiration and make a profit on the price difference. For example, if you buy a futures contract and sell the same one before expiration, the two transactions are offset, and there is no need to worry about physical delivery.

Futures can also add leverage. You only have a little money in your account, but you can control a larger position. This amplifies gains as well as losses. If the margin is insufficient, the exchange will force the position to be liquidated, which is also a "liquidation". Therefore, before doing futures, you must understand how margin is calculated, and don't use leverage in a haphazard manner.

In the cryptocurrency circle, the most popular thing is actually the “perpetual contract”. It has no expiration date and can be held as long as you want. In order to keep the perpetual price from being too different from the spot price, it has a funding rate mechanism: when the perpetual price is higher than the spot, the longs have to pay the shorts regularly; in turn, the shorts pay the longs. In 2025, perpetual contracts accounted for approximately 77% of the total cryptocurrency exchange trading volume, and can be said to be the most used tool in the digital asset market.

Both forwards and futures can be used for hedging. Wheat farmers are afraid that wheat prices will fall in half a year, so they sell futures in advance to lock in the price; Bitcoin miners are afraid of currency prices falling, so they can also sell futures to protect their income. Of course, there are also people who simply want to bet on the direction: go long if they are bullish, and go short if they are bearish. The futures market also helps everyone discover prices - when the futures price is too different from the spot price, arbitrageurs will enter the market and bring the price back to a reasonable range.

Futures prices are sometimes higher than spot prices, which is called "contango", usually due to storage costs or capital costs; conversely, it is called "backwardation", which often means that spot goods are now in high demand. There is no need to memorize these terms, just know that they exist.

To sum up: forwards are flexible but you bear the risks yourself, while futures are standardized and backed by a clearing house. Perpetual contracts are the mainstream in cryptocurrency, but they have high leverage and high volatility. Newbies must first understand margin, funding rates and position management before starting.

Reference: Binance Academy Original link: https://www.binance.com/en/academy/articles/what-are-forward-and-futures-contracts

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