Futures with an Expiry Date

2.1 The farmer and the baker

"Before perps make sense, you need to understand the contract they evolved from," said Hash. "And the easiest way to understand futures is to forget crypto for a moment."

A wheat farmer will harvest in three months. A baker will need wheat in three months. Neither knows what the price will be then. The farmer worries prices will fall; the baker worries they'll rise.

So they agree today: in three months, the farmer will sell the baker 1,000 kilograms of wheat at $0.30 per kilogram, whatever the market price is then. Both now know exactly what they'll receive or pay. They've removed their uncertainty.

That agreement is a futures contract: an agreement to buy or sell an asset at a set price on a set future date.

2.2 Futures contracts, formally

Term	Meaning
Underlying	The asset the contract is based on, such as BTC
Contract size	How much of the underlying one contract represents
Futures price	The price agreed for the future transaction
Expiry date	When the contract ends and settles
Settlement	How the contract is completed: by delivering the asset or paying the difference in cash

Most crypto futures are cash-settled: at expiry, nobody hands over actual bitcoin. Instead, the difference between the futures price and the final reference price is paid in cash or stablecoins.

Crypto exchanges commonly list futures that expire quarterly, and some list weekly and monthly contracts too. Regulated exchanges in traditional finance, like the CME (Module 4, Chapter 15), also list Bitcoin and Ether futures, used heavily by institutions.

2.3 Profit and loss

If you buy (go long) one BTC future at $100,000 and the price at expiry is $108,000, you gain $8,000. The person who sold (went short) loses $8,000.

Futures price agreed	Final settlement price	Long's result	Short's result
$100,000	$108,000	+$8,000	−$8,000
$100,000	$95,000	−$5,000	+$5,000

Notice this is exactly the same as if the long had bought spot BTC at $100,000 and sold it at expiry, except no bitcoin changed hands.

You don't have to hold until expiry. Futures can be closed at any time by taking the opposite trade, locking in profit or loss at the current futures price.

2.4 Futures prices differ from spot

A BTC future expiring in three months usually doesn't trade at exactly the spot price. The difference is called the basis.

Basis = futures price − spot price

	Price
Spot BTC	$100,000
Three-month future	$102,000
Basis	$2,000, or 2%
Approximate annualised basis	About 8% a year

Why would a future trade above spot? Consider the alternatives. Someone who wants bitcoin exposure in three months could buy spot today, but that ties up their cash. Buying the future instead lets them keep their cash, earning interest elsewhere, while still getting exposure. So futures usually trade at a premium that roughly reflects the cost of money over that period, plus demand for leverage.

In crypto, the basis is often higher than traditional interest rates, especially in bull markets, because many traders want leveraged long exposure and are willing to pay for it.

2.5 Contango and backwardation

Condition	Futures vs spot	Typical cause
Contango	Futures above spot	Normal market; cost of money and bullish demand
Backwardation	Futures below spot	Strong bearish sentiment or urgent demand for the spot asset

In crypto, contango is the usual state. Deep backwardation tends to appear during crashes and panics, when traders rush to short or hedge.

2.6 Convergence

As expiry approaches, the futures price and the spot price move together, because at expiry the future settles at the spot reference price. A 2% basis three months out shrinks toward zero as the date nears. This is called convergence.

Time to expiry	Spot	Future	Basis
3 months	$100,000	$102,000	2.0%
1 month	$100,000	$100,700	0.7%
1 day	$100,000	$100,020	0.02%
At expiry	$100,000	$100,000	0%

(Spot is held constant here to isolate the effect. In reality both move.)

This convergence is what anchors futures to spot. It's also the basis of a popular strategy: buy spot, sell the future, and collect the basis as it converges. Chapter 12 covers this cash-and-carry trade.

"So the expiry date is like a magnet pulling the futures price back to reality," said Mint.

"Exactly," said Hash. "And that's the problem perps had to solve. If you remove the expiry, you remove the magnet."

Chapter 2 · Basis and convergence

Spot price stays roughly flat while a dated future trades above it, a positive basis called contango. As the contract approaches expiry, the basis narrows and the futures price converges to spot, reaching equality at settlement.

2.7 Rolling

Traders who want to hold a futures position beyond expiry must roll it: close the expiring contract and open a new one with a later date. Rolling has costs: trading fees each time, and often paying the basis again on the new contract.

This inconvenience is one reason perpetual futures became so popular. They let traders hold positions indefinitely without rolling.

2.8 Try it yourself

Find the current price of a quarterly BTC futures contract on any exchange that lists them, along with the BTC spot price. Calculate the basis in dollars and as a percentage. Then estimate the annualised basis by adjusting for the number of days to expiry. Is the market in contango or backwardation?

Key takeaways from this chapter

1. A futures contract is an agreement to buy or sell an asset at a set price on a set date.
2. Most crypto futures are cash-settled; profits and losses are paid without delivering the asset.
3. The basis is the difference between the futures price and spot, often reflecting the cost of money and demand for leverage.
4. Contango, futures above spot, is the normal state in crypto; backwardation appears during panics.
5. Futures converge to spot as expiry approaches, which anchors their price.
6. Holding beyond expiry requires rolling, which adds costs. Perpetual futures remove the need to roll.