How to Trade Ethereum (ETH) Futures: Step-by-Step Guide
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Ethereum (ETH) often moves in tandem with Bitcoin, although typically with wider price swings to the upside or downside. Ethereum futures trading lets you take advantage of these swings using either short (bets on a price decline) or long (bets on a price increase) without owning ETH. Better yet, you can use leverage to multiply your gains so small movements can lead to big profits.
In this guide, we’ll explain how to trade Ethereum futures using a centralized crypto exchange and how to mitigate risks in trading with leverage. We’ll also discuss alternative methods of trading futures with decentralized platforms or exchange-traded funds (ETFs).
Let’s get started with a basic explanation of futures.
What are Ethereum Futures?
Futures refer to derivatives of an asset rather than the asset itself. Ethereum futures are a bet on Ethereum’s future price rather than a reflection of the current price.
In traditional spot market trading, you can buy Ethereum when you think the price will go up and sell when you think the price will go down. You buy or sell based on the current price. Futures contracts instead allow you to hold your bet open, sometimes indefinitely, without ever needing to buy or sell Ethereum.
Futures trades aren’t random bets like those you might make in a casino. Instead, they’re often based on technical indicators, trading volume, chart patterns, trading cycles, and even macroeconomic or industry news. The combination of these factors can point to a future price that’s higher or lower than the current price.
With that in mind, we can examine the mechanics behind futures trading, with a focus on perpetual futures contracts.
How Does Ethereum Futures Trading Work?
While there are multiple ways to trade Ethereum futures, including delivery futures and ETFs, we’ll focus on the most common method: perpetual futures contracts. Perpetual futures, also known as perps or perpetual swaps, allow traders to keep a position open as long as the underlying collateral, which is called margin, is sufficient. Let’s explore the components of perpetual futures to understand how they fit together.
Leverage
Using these contracts, you can go long or short and choose leverage of 1x (no leverage) up to 200x on some platforms. Leverage means you can control a larger trade position with a comparatively smaller amount of your own capital (margin).
Let’s break that down with a simplified example.
- A $100 trade at 1x leverage = $100 trade
- A $100 trade at 100x leverage = $10,000 trade
In effect, you can multiply your potential profit by using leverage. A 1% rise in ETH’s price on the $100 trade gives you $1 in profit. By contrast, the same 1% rise in price with leverage creates a $100 profit. Let’s call this a gross profit, because there are other expenses associated with the trade.
On the other hand, a 1% decrease in ETH’s price using 100x leverage will lead to a $100 loss. That loss amount uses your entire margin, and the position will be liquidated (sold to cover the loss). While leverage provides a powerful tool, it’s often best to use it conservatively when trading volatile assets.
Funding Rates
Perpetual futures markets represent traders on both sides of the trade and use a clever mechanism called funding rates to keep the contract price close to the spot market price. Without this mechanism, the contract price could meaningfully diverge from the spot price. Positive and negative funding rates help to tether the contract price to the spot price.
- Positive Funding Rate: If the futures contract price is trading above the spot price, the long position holders pay the short position holders. This indicates that there are more buyers (longs) than sellers (shorts).
- Negative Funding Rate: If the futures contract price trades below the spot price, the short position holders pay the long position holders. This indicates more sellers than buyers.
Funding rates are charged periodically, typically every 8 hours, which can create an ongoing cost for holding a position. In effect, the funding rate encourages trades on the overweighted side of the trade to close their positions, thus bringing the contract price closer to the spot price.
Margin and Liquidation Risk
Earlier, we discussed margin, which is the amount of funds you use to back the trade. However, there are two margin amounts to consider: initial margin and maintenance margin.
- Initial Margin: This refers to the amount of collateral that you must have to open an Ethereum futures trade at a given leverage amount. For example, if you want to open a 10x leveraged trade worth $1,000, you need $100 in initial margin.
- Maintenance Margin: The maintenance margin acts as a buffer for the exchange. While the maintenance margin can vary based on the asset and market conditions, it’s often between 50% and 75% of the initial margin. With a 50% maintenance margin, the trade would be closed (liquidated) if the value of the $1,000 10x trade falls 5%.
In application, this means you don’t have the entire initial margin to work with. Instead, you may have 50% or less of the initial margin. The remainder serves as a buffer for the exchange to insure against sudden market moves that could create losses for the trading platform. Overages liquidations typically go to an “insurance fund” that helps keep the platform solvent in future price swings.
The key takeaway is that you can lose your entire position long before losing all your capital. Leverage amplifies gains, and maintenance margin requirements can cause your position to be liquidated earlier than you might think. On the other hand, leverage can dramatically amplify your gains, but should be used prudently to reduce liquidation risk.
How to Trade Ethereum Futures: Step-by-Step Guide
Let’s walk through the basic steps to trade futures using perpetual contracts. In this example, we’ll use USDT-M futures so we don’t have to worry about the value of our margin shifting with market moves. We chose CoinFutures for this example because the platform is perfect for beginners and offers flexible leverage options, plus it doesn’t enforce Know Your Customer (KYC) identity verification.
Follow the steps below to get started:
1) Sign Up With CoinFutures
Visit the official CoinFutures website to open an account. You’ll need to provide an email, choose a nickname, and create a secure password. Alternatively, you can simply download the ConFutures app and connect your MetaMask wallet to trade Ethereum futures anonymously.
2) Fund Your Account
Since we’ll be using USDT as margin for Ethereum futures, you’ll need USDT in your trading account. USDT is a stablecoin token that tracks the value of the US dollar. CoinFutures supports on-chain deposits if you already have crypto in a non-custodial wallet or another crypto exchange.
Simply pick the amount you wish to transfer and hit the Deposit button.
3) Choose Crypto Futures
From the top menu, choose Crypto Futures, and you’ll be greeted by the CoinFutures trading interface, which displays BTC/USDT as the default trading pair.
4) Choose ETH/USDT
Switch to ETH/USDT for the trading pair. The process is similar for other trading pairs, such as BTC/USDT.
5) Choose Your Leverage
CoinFutures supports up to 1,000x leverage for ETH futures trades. However, we’ll use 10x leverage for this trade. Lower leverage allows for a smaller impact from market fluctuations and reduces the risk of liquidation.
6) Set Your Trade Amount and Risk Management Settings, and Open Your Trade
Choose an amount for your trade. In this example, we chose $70, which at 10x leverage, brings our total position size to $700.
Be sure to leave some extra USDT in your trading account to cover trading fees.
CoinFutures supports take-profit and stop-loss settings to exit your position automatically. A take-profit order ensures that you lock in profits, thereby reducing the risk of losing them through round-tripping.
On the other hand, a well-calculated stop loss protects your capital for the next trade, but be aware that a tight stop loss close to your entry cost could close your position earlier than expected (and leave you with less capital for the next trade).
Once you’re ready, just hit the Place Bet button and your Ethereum futures trade will be executed.
Where to Trade Ethereum Futures
While centralized crypto exchange platforms like CoinFutures offer the most straightforward way to trade Ethereum futures, there are alternative methods for trading futures, including decentralized exchange protocols and ETH futures ETFs. Let’s compare each of these.
Centralized Exchanges
A centralized crypto exchange refers to a trading platform governed by a management team that defines the trading structure and controls who can access the platform. The exchange provides custody for any trading funds you deposit on the platform. Crypto assets are held in a custodial wallet, again controlled by the exchange. Centralized exchanges are a convenient way to buy the best crypto.
Centralized exchanges offer a fiat on-ramp, sometimes through third-party providers, that allows you to exchange traditional fiat currencies for crypto assets, trade crypto for other cryptocurrencies, or trade perpetual futures. Notably, some centralized platforms also offer expiration futures, which we’ll briefly discuss later.
Decentralized Exchange Protocols
If you already own some cryptocurrency in a non-custodial wallet, you can also trade futures on decentralized protocols. In this case, you could connect your wallet to a decentralized application (dApp), such as GMX, dYdX, or Hyperliquid.
These protocols operate similarly to perpetual futures trading on centralized exchanges, although their governance structures differ. Typically, these dApps utilize a decentralized autonomous organization (DAO) to steer the project’s direction, rather than a management team.
Another key difference is in accessibility. Anyone can connect to a decentralized protocol without needing permission from the exchange. Although front-end UIs or terms and conditions may disallow users from specific jurisdictions, as a technical matter, anyone can interact with the smart contracts that allow trading.
Notably, decentralized exchanges are largely unregulated, whereas one or more governments typically regulate centralized exchanges.
Ethereum Futures ETFs
Before Ethereum spot market ETFs were approved in the US, ETH futures ETFs acted as a proxy for investors who wanted ETH exposure in their portfolios. These exchange-traded funds provide an easy way to access Chicago Mercantile Exchange (CME) Ether Futures on regulated exchanges.
ETH futures ETF options are available in both leveraged and non-leveraged variants. Non-leveraged variants, such as ProShares Ether Strategy ETF (EETH), provide a closer proxy to ETH’s spot market prices. Leveraged options, such as the ProShares Ultra Ether ETF (ETHT), amplify market movements, with both long and short variants available through brokerages.
Regulated Commodities and Futures Exchanges
ETH futures began trading on the CME Group (Chicago Mercantile Exchange) on February 8, 2021. Ethereum futures also trade on the Cboe Futures Exchange (CFE). These regulated exchanges use expiration contracts and settle trades in USD. They also provide inventory for ETH futures ETFs, which buy and sell these futures contracts.
While some brokerages offer access to regulated ETH futures contracts, minimum trade requirements and trader qualifications make this option less accessible to everyday traders.
Types of Ethereum Futures Trading
In the previous sections, we touched on perpetual futures and delivery futures, also commonly referred to as expiration futures or dated futures. Let’s review these, as well as their margin types available for perpetual futures and expiration futures.
It’s important to note that while trading futures directly on regulated exchanges or crypto platforms requires users to fund margin, investing in futures ETFs does not impose margin requirements on the individual investor (ETF managers manage margin for their underlying futures holdings).
- Perpetual Futures: Perps use funding rates as an incentive or disincentive to align the contract price with the spot price. This structure enables traders to maintain open positions indefinitely, provided they retain sufficient margin to prevent liquidation.
- Expiration Futures: Although less common on centralized crypto exchanges, expiration options feature a date at which the contract expires. Typically, these expire at the end of a calendar quarter. Rather than use funding rates, the contract price converges with the spot market price at expiration. Expiration options also limit leverage in most cases, using up to 50x leverage versus the 100x or even 200x available leverage often seen with perpetual futures contracts.
ETH Futures Margin Types
Additionally, Ethereum futures may utilize different types of assets as collateral or margin. Most commonly, ETH contracts use USDT for margin, which is a stablecoin token pegged to the US dollar and backed by cash, bonds, and other assets. Some contracts use the USDC token, which has a similar real-world asset (RWA) backing.
However, specific platforms may offer coin-margined futures. For example, you can use ETH as your margin for Ethereum futures or BTC as your margin for Bitcoin futures rather than USDT, USDC, or a similar stablecoin.
This strategy can be advantageous if you open a long position and the value of ETH also rises. In this situation, the collateral value increases as the contract value also sees gains.
A successful trade results in a larger ETH holding upon contract settlement. By contrast, this strategy could prove disastrous for short positions or if the market experiences a steep decline. In this case, the value of the margin shrinks, pushing the position closer to liquidation.
Why Trade Ethereum Futures? The Benefits
Let’s review some of the key advantages of trading Ethereum futures as opposed to spot market buy-and-hold strategies or swing trading spot markets. We’ll focus on perpetual swaps, as they represent the most common way to trade ETH futures. Perp trading offers more flexibility in trade structure and better use of capital.
- Leverage: Using leverage in trades can generate much higher gains relative to the margin you offer in the trade. A 1% move to the upside on a long position with 100x leverage doubles your investment, less trading fees.
- Capital Efficiency: $100 in margin controls a $5,000 trade at 50x leverage. Futures trading enables traders to utilize capital more efficiently, potentially entering multiple trades with the funds required for a single spot trade of the same size.
- Ability to Trade the Market Up or Down: Futures allow traders to go long or short on a trade, whereas spot markets only support buying or selling. Margin trading supports short selling, but with lower available leverage.
- Higher liquidity: Futures markets often attract more capital, resulting in smoother trades with tighter spreads between buy and sell orders and reduced price slippage on trades.
- Hedging: Futures trading can be used to hedge existing positions. For example, if you have a long ETH position but suspect ETH will dip, a short ETH futures trade provides a way to profit from the anticipated price decrease without selling your ETH position.
Risks of Trading Ethereum Futures
While futures trading offers several advantages, it also presents several risks to consider before opening a trade. It’s possible to lose all of your investment in mere moments, especially when trading with high leverage. Funding rate costs can also chip away at your margin over time. Let’s review some key risks associated with futures trading in more detail.
Amplified Losses Due to Leverage
Trading with leverage can help traders realize outsized gains, but that same leverage can be a liability if the market goes against their trade. A 1% market move against your position spells liquidation at 100x leverage.
Liquidation Risk
A losing trade reduces available margin, creeping closer to the maintenance margin limit. Once the maintenance margin threshold is reached, the exchange liquidates the position and closes the trade. For example, if the initial margin was $100, the exchange can liquidate the position when the maintenance margin reaches $50 or even sooner.
Funding Rate Costs
Funding rates can affect both long and short trades, reducing the available margin for the trade and potentially diminishing potential profits.
Added Stress
Let’s not ignore the emotional toll. Trading with leverage often brings more anxiety compared to buying on the spot market.
Steeper Learning Curve
Futures trading is more complex than spot trading, making it more challenging for new traders to grasp. However, many platforms, such as CoinFutures, offer beginner-friendly interfaces and clear explanations for each setting to make your life easier.
According to some estimates, hundreds of cryptocurrency exchanges have collapsed in recent years, including high-profile failures such as the FTX collapse. In these situations, investors may be unable to recover funds held on the exchange.
Conclusion
Trading Ethereum futures can be extremely profitable and makes much more efficient use of capital because a small investment can control a much larger trade. However, it’s important to use leverage carefully. A series of small wins may be safer than trying for a big win and potentially losing your trading capital. Platforms like CoinFutures make trading futures accessible and allow you to control your risk via flexible leverage and stop-loss/take-profit orders.
FAQs
Is Ether a security?
When do Ethereum futures expire?
How is Ethereum futures trading taxed?
How much money do you need to trade Ethereum futures?
References
- US spot ether ETFs make market debut in another win for crypto industry (reuters.com)
- Ether futures product overview (cmegroup.com)
- ‘Old-fashioned embezzlement’: where did all of FTX’s money go? ( theguardian.com)
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