📘 Crypto & Futures: Essential Terms

~9 min read · For reference, not a prediction

Why you should read this first

Crypto futures trading is half about the vocabulary. If words like 'long,' 'short,' 'leverage,' and 'liquidation' aren't familiar, you can stare at the screen and still have no idea what's happening.

This article walks through the terms newcomers run into most often, one at a time and briefly, like a dictionary. You don't have to memorize it all at once. Just come back and look something up whenever you get confused.

Baro's other articles are written assuming you already know these terms. So think of this one as a kind of 'foundation.'

Spot vs. futures (and perpetuals / perp)

These are the first two things to tell apart. Both involve trading crypto, but 'what you're actually trading' is different.

• Spot: Buying and selling the actual coin directly. If you buy $10 worth of Bitcoin, that much Bitcoin shows up in your account. Price goes up, you gain; price goes down, you lose. Intuitive, right?
• Futures: Instead of the coin itself, you're entering a contract on its 'price movement.' You don't actually hold the coin — you take a position on whether the price will go up or down.
• Perpetual futures (perp for short): A type of futures with 'no expiry date.' Ordinary futures have a settlement date like 'settled on such-and-such day,' but a perpetual has no expiry, so you can hold it for as long as you want. Most crypto futures trading is in these perps.

Long and Short

With futures, you can take a position not only on the way up but also on the way down. This is the biggest difference from spot.

• Long: A position you take expecting the price to rise. Up means profit, down means loss. It's similar in direction to 'buying.'
• Short: A position you take expecting the price to fall. Down means profit, up means loss. It's a concept unique to futures that doesn't exist in spot.

The part beginners find most confusing is shorting. 'How do I profit when the price goes down?' just doesn't match intuition. It's easier to grasp if you think of it as borrowing the coin for a moment, selling it at a high price, then buying it back cheap to repay it. In practice the exchange handles all of this internally, so all we do is press the 'short button.'

Leverage (multiplier) and margin

Leverage is the heart of why futures are both dangerous and eye-catching. Think of it as 'a multiplier that lets you trade with more money than you actually have.'

For example, if you apply 10x leverage to your $100, you can take a $1,000 position. The $100 you actually put up here is called margin. It's essentially a deposit you leave with the exchange.

• Leverage (multiplier): The value that sets how many times your margin you'll trade with. You can pick options like 2x, 5x, 10x, or 50x.
• Margin: The money of your own that you actually lock up to take that position.
• Position size: Margin × leverage. In the example above, $100 × 10x = $1,000.

Why liquidation (forced close) happens

Liquidation is what futures beginners run into most often. Simply put, it's 'the exchange forcibly closing your position right before your margin runs out.'

The exchange wants losses settled strictly within the margin you've put up. The price at the point where losses have eaten up almost all of your margin is called the liquidation price, and once the price reaches it, the exchange closes your position regardless of your wishes. At that point you lose most of your margin.

1. You open a positionExample: a long with $100 of margin at 10x leverage.
2. The price moves against youIf you're long and the price falls, losses start to pile up.
3. Losses close in on your marginAt 10x, roughly a 10% drop nearly exhausts your margin.
4. Reaching the liquidation price forces a closeThe exchange automatically closes the position, and your margin is almost gone. Even if the price recovers afterward, the position is already closed.

Isolated margin vs. cross margin

When you open a position, you choose 'how to put up the margin,' broadly in one of two ways. This choice directly affects your liquidation risk.

• Isolated margin: You lock up exactly that much margin for this one position. Even if it gets liquidated, you only lose the margin assigned to that position — the rest of the money in your account stays untouched. The range of what you can lose on a single trade is clear-cut.
• Cross margin: Your entire account balance is used as backing for that position too. So it withstands liquidation better, but if things go wrong, your whole account can be at risk.

Funding fees (Funding)

This is a distinctive concept that exists only in perpetual futures (perp). Since there's no expiry, it's a mechanism that keeps the futures price from drifting too far from the actual spot price.

The funding fee is an amount exchanged between longs and shorts at regular intervals (it varies by exchange, but often every 8 hours). The key point is that the exchange doesn't take it — it's exchanged among the position holders themselves. When there are more longs in the market, longs pay shorts; when there are more shorts, it's the reverse.

• When the funding fee is positive (+): Longs typically pay shorts. If you're holding a long, a little bit drains away each time.
• When the funding fee is negative (-): Shorts typically pay longs. If you're holding a long, you actually receive a little each time instead.
• It only occurs if you're holding the position at the settlement moment. If you close before then, you don't pay the funding fee for that round.

Maker and taker fees

These are the fees you pay the exchange every time you trade, and they split into two kinds depending on how you place your order. Even for the same trade, the fee differs based on how you order.

• Maker: When you place a 'resting order' (a limit order) at a price away from the current market price. Because your order sits in the order book and 'makes' liquidity for the market, it's called a maker. The fee is usually cheaper.
• Taker: When you place an 'immediate order' (a market order) that fills right away. Because it 'takes' an order already in the order book to fill, it's called a taker. The fee tends to be higher than a maker's.

A point beginners get confused about: 'buying at market is fast, but it tends to cost more in fees.' If you're not in a hurry, aiming for the maker fee with a limit order is a way to save on costs. That said, a limit order may not fill if the price doesn't reach the level you set.

USDT / USDC (stablecoins)

On a futures trading screen, prices are written like 'BTC/USDT.' Here, USDT is the money that serves as the basis of the trade.

• Stablecoin: A coin designed to stay close to 1 US dollar (USD). Unlike Bitcoin, it doesn't swing wildly and hovers near $1, so it plays the role of 'cash for trading.'
• USDT (Tether): The most widely used stablecoin. It's the default settlement currency on most exchanges.
• USDC: Another stablecoin similar to USDT. Both are pegged to $1, but they have different issuers.

For Korean retail traders, the flow usually goes like this: you buy crypto with Korean won on a domestic exchange, send that crypto to an overseas exchange, and there convert it into USDT to use as futures margin. So 'getting hold of USDT' often becomes the starting point for futures.

Wallet addresses and networks

This is a concept you're bound to encounter when moving crypto between exchanges or storing it in a personal wallet. A mistake here can make your crypto disappear, so it's a part to be especially careful with.

• Wallet address: Like an 'account number' you can receive crypto at. It's usually a long, complicated combination of letters and numbers. Send crypto to this address and it goes into that wallet.
• Network (Network/Chain): Like a 'road' the crypto travels on. Even the same USDT can be sent over different networks, such as Ethereum (ERC-20) or Tron (TRC-20).
• Wallet: The space where crypto is stored. There are wallets inside an exchange, and there are personal wallets like MetaMask.

Terms at a glance

This table is made for you to come back to and look something up quickly whenever you're confused. Detailed explanations of each term are in the sections above.

Once you have a decent grasp of the terms, it helps to follow up with the actual screen-by-screen flow in the → 'How to Trade Futures' guide.