Derivatives: futures, perpetual swaps and options

In digital assets, derivatives usually trade far more volume than the spot market, and leverage in derivatives is what turns ordinary price moves into crashes. Risk, treasury and compliance professionals need to read funding rates, basis and open interest, and to understand how margin engines liquidate positions, because those mechanics drive prices well beyond the derivatives venues themselves.

Regulated futures

A futures contract is an agreement to buy or sell an asset at a set price on a future date. Crypto futures on regulated exchanges are almost always cash-settled: no coins change hands, and the contract settles against a reference rate.

CME Group listed bitcoin futures in December 2017 and ether futures in February 2021. The standard bitcoin contract is 5 BTC and the micro contract 0.1 BTC; bitcoin futures settle against the CME CF Bitcoin Reference Rate described in the lesson Trading venues, order books and price discovery. Since 29 May 2026, CME's crypto futures and options trade 24 hours a day, seven days a week, ending the weekend gap during which CME prices could drift from spot.

The basis is the futures price minus the spot price. Futures usually trade above spot (contango), reflecting the cost of funding a long position and demand for leveraged long exposure. It is quoted as an annualized rate. If spot is 80,000 and the three-month future is 81,600, the basis is 1,600, or 2.0% over three months, about 8% a year on a simple basis.

Perpetual swaps and funding rates

The perpetual swap ("perp"), introduced by BitMEX in 2016, is a futures-like contract with no expiry date. It is the most traded instrument in crypto. Because it never settles, a different mechanism keeps its price near spot: the funding rate, a periodic payment between longs and shorts.

• When the perp trades above the spot index, funding is positive and longs pay shorts.
• When it trades below, funding is negative and shorts pay longs.
• Many venues settle funding every eight hours; some settle hourly.

Funding is calculated from the gap between the perp and the index, often plus a small fixed interest component. Small numbers compound: 0.01% every eight hours is 0.03% a day, or about 11% a year; 0.10% every eight hours is about 110% a year. Persistently high positive funding signals crowded leveraged longs.

Venues use a mark price, derived from the index rather than the venue's last trade, to calculate unrealized profit and loss and trigger liquidations. This protects traders from being liquidated by a single erratic trade on one venue, but only if the index itself is robust.

The basis trade

A cash-and-carry or basis trade captures the basis without taking a view on price:

1. Buy spot (or a spot ETP) at 80,000.
2. Sell the three-month future at 81,600.
3. At expiry, the two legs converge; the 1,600 gain is locked in whatever the price does.

A perpetual version buys spot and shorts the perp to collect positive funding. These trades are a major source of demand for spot ETPs and of open interest on CME. They are not risk-free: the short futures leg needs cash margin when prices rise, so a fund can face large margin calls while its gains sit in the spot leg; funding can turn negative; and with perps, the venue's own solvency and liquidation rules become part of the trade.

Options and implied volatility

A call gives the right to buy at a strike price, and a put the right to sell, on or before expiry. The buyer pays a premium; the seller collects it and takes on the risk.

Option prices imply how volatile the market expects the asset to be. Implied volatility (IV) is that expectation backed out of option prices, quoted as an annualized percentage. Bitcoin IV has usually been well above that of major equity indices. Skew compares IV for puts and calls: when puts are more expensive, traders are paying for downside protection.

Crypto options trade on specialist venues, the largest of which, Deribit, was acquired by Coinbase in August 2025; on CME; and, since 2024, as listed options on US spot bitcoin ETPs. CME also lists Bitcoin Volatility futures, which let traders take a view on 30-day implied volatility without a directional position.

Leverage, margin and liquidation

Leverage multiplies exposure relative to the collateral posted. Three margin terms matter:

Take a 10x long: $10,000 of collateral supports $100,000 of bitcoin, or 1.25 BTC at 80,000. With a 0.5% maintenance margin, ignoring fees, the position is liquidated when the price falls to about 72,360, a drop of roughly 9.5%. At 50x, a drop of under 2% is enough.

When a position is liquidated, the venue's engine closes it at market. If the price moves past the point where the account's collateral is exhausted, the shortfall is first absorbed by the venue's insurance fund. If that is not enough, the venue uses auto-deleveraging (ADL): it forcibly closes profitable positions on the other side, ranked by profit and leverage, to cover the loss. ADL can close a market maker's hedge, leaving it suddenly exposed.

Open interest (OI) is the total value of contracts outstanding. Rising OI with rising prices means new leveraged money; a sudden fall in OI means positions are being closed or liquidated.

Read together, these indicators give an early warning. Suppose bitcoin rises 10% in a week while open interest rises 25% and funding climbs to 0.05% every eight hours: much of the rally is being bought with borrowed money, and liquidation prices are clustering just below the market. The same price rise with flat open interest and neutral funding is driven more by spot buying and is less fragile.

When many leveraged longs sit at similar levels, one round of forced market selling pushes the price to the next cluster of liquidation prices. This liquidation cascade is self-reinforcing and moves fastest when order books are thin.

Case: the liquidation event of 10–11 October 2025

On 10 October 2025, after the US President announced 100% tariffs on imports from China, crypto prices fell sharply on Friday evening, after US stock markets had closed and liquidity was thin. Within 24 hours more than $19 billion of leveraged positions was liquidated across venues, according to CoinGlass data, the largest such event on record. About 1.6 million accounts were affected; roughly $16.7 billion of the total was long positions and $2.5 billion shorts. Bitcoin fell from a high of about $122,500 to about $104,800, around 14.5%, and many smaller tokens fell far more for a few minutes.

Several mechanics made it worse:

• Collateral marked to one venue's own book. On Binance, Ethena's synthetic dollar USDe and the staking tokens wBETH and BNSOL fell sharply on Binance's order books (USDe to about $0.65) while trading close to their usual values elsewhere. Because accounts were valued using Binance's internal prices, users holding them as collateral were liquidated. Binance paid about $283 million in compensation.
• Auto-deleveraging. ADL was triggered on several venues, including the decentralized perp exchange Hyperliquid, closing profitable short positions, among them hedges held against long spot exposure.
• Infrastructure stress. Some venues throttled programming interfaces or went offline, so traders could not add collateral or close positions.
• Data gaps. CoinGlass said the true total was likely higher; Hyperliquid's co-founder noted that some centralized exchanges publish at most one liquidation per second.

For a risk manager, the lessons are concrete: know the price source used to value collateral, haircut volatile and synthetic collateral, assume hedges on a venue can be auto-deleveraged, and size positions for gaps when liquidity disappears.

Exam focus: cash-settled CME futures and their reference rate; basis and contango, and how to annualize it; how perpetual swaps use funding rates (who pays whom) and the mark price; how the basis trade works and its margin risk; calls, puts, implied volatility and skew; initial and maintenance margin and how to estimate a liquidation price; insurance funds, auto-deleveraging and open interest; the mechanics of a liquidation cascade and the October 2025 event (over $19 billion in 24 hours, collateral priced on a single venue, ADL).