What is a derivative?
A derivative is a financial instrument whose value is linked to another asset, rate or reference.
A BTC futures or perpetual position is therefore different from purchasing BTC in the spot market.
Traditional futures
A conventional futures contract has defined contract specifications and an expiration or settlement date.
Perpetual futures
A perpetual contract is designed without a fixed expiry date. Crypto venues commonly use a funding mechanism to help keep perpetual prices aligned with their underlying reference market.
LONG and SHORT exposure
Derivatives allow both long and short directional positions directly. Profit and loss changes with the contract price and the direction of the position.
Why derivatives require extra care
Leverage, margin requirements, liquidation mechanics, funding payments and exchange-specific contract rules create risks that do not exist in the same form in an ordinary unleveraged spot purchase.
Expiry and settlement
Traditional futures have contract specifications that define an expiration or settlement process. Before expiry, a futures price can trade above or below the underlying spot market.
Perpetual contracts are designed without a normal expiration date. Crypto venues commonly combine funding and reference-price mechanisms to help keep perpetual prices connected to their underlying markets.
Notional exposure and collateral
Derivative exposure is often described by notional value: the market value represented by the position. When leverage is used, the collateral supporting that exposure can be much smaller than the position's notional value.
This separation between exposure and collateral is one reason relatively small underlying price movements can create much larger percentage changes in the collateral supporting a leveraged position.
Contract specifications matter
Products can differ in contract size, settlement asset, collateral type, funding rules, tick size, maintenance requirements and liquidation methodology.
A rule learned on one exchange should therefore not automatically be assumed to work identically on another venue or contract.
A futures or perpetual position creates exposure according to its contract terms. It is not the same as holding the underlying cryptocurrency in a spot wallet.
Key takeaways
- Futures and perpetuals are derivatives, not the same transaction as buying the underlying crypto asset.
- Traditional futures have expiry or settlement terms; perpetual contracts are designed without fixed expiry.
- Perpetual markets commonly use funding mechanisms to support price alignment.
- Contract specifications and risk rules vary by venue.
Sources & further reading
This lesson is educational material. Market structure, exchange rules, fees, margin requirements and derivatives mechanics can differ by venue and can change over time. Verify current rules with the venue you use.