What is the difference between inverse and linear crypto futures contracts?

Understanding Inverse Crypto Futures Contracts

1. Inverse futures contracts are settled in the cryptocurrency that serves as the base asset of the contract, rather than in fiat or stablecoins. For example, a BTC/USD inverse future is denominated and settled in Bitcoin.

2. Traders must deposit and maintain margin in the base cryptocurrency. This means if you're trading a BTC inverse contract, your margin will be held in BTC, exposing you to volatility in its price even beyond the trade itself.

3. The profit and loss calculation for inverse contracts is non-linear due to the settlement mechanism. As the underlying price moves, the amount of BTC gained or lost per dollar change varies inversely, making risk management more complex.

4. These contracts were initially popularized by exchanges like BitMEX and are commonly used in markets where traders want exposure to USD-denominated prices but prefer settlement in crypto.

5. Inverse contracts amplify risk during high volatility because losses are paid in the appreciating asset, which could worsen liquidation outcomes.

Exploring Linear Crypto Futures Contracts

1. Linear futures contracts are settled in stablecoins or fiat currencies such as USDT, USD, or USDC. A BTC/USDT linear future, for instance, uses USDT for both margin and settlement.

2. Because margin is posted in a stable asset, traders avoid direct exposure to the base cryptocurrency’s price swings on their collateral. This makes position sizing and risk assessment more intuitive.

3. Profit and loss are calculated linearly — each tick movement corresponds directly to a fixed gain or loss in the quote currency, simplifying calculations and hedging strategies.

4. These contracts are favored by institutional traders and newcomers who seek straightforward exposure without compounding risks from asset volatility affecting their margin balance.

5. The use of stablecoins in linear contracts reduces psychological and financial pressure caused by sudden shifts in the value of margin holdings.

Key Structural Differences Between Inverse and Linear Contracts

1. Settlement assets differ fundamentally: inverse contracts settle in the base crypto (e.g., BTC), while linear contracts settle in stablecoins or fiat equivalents.

2. Margin requirements follow the settlement method — inverse requires volatile crypto margin; linear uses stable assets, leading to different capital efficiency profiles under market stress.

3. PnL sensitivity varies with price levels in inverse contracts due to their design, whereas linear contracts offer consistent dollar-value responses across price ranges.

4. Funding rates function similarly in both types, but the impact on traders differs — paying funding in BTC when it's rising can be more burdensome in inverse contracts.

5. Traders holding short positions in inverse contracts benefit more during sharp downtrends since they receive BTC as profits when its USD value drops.

Common Questions About Crypto Futures Contracts

What happens to my margin if BTC crashes while I’m shorting an inverse futures contract?When you short an inverse BTC futures contract and the price drops significantly, your profit is paid in BTC. Although the USD value of your gain increases, your margin — also in BTC — may rise in USD terms, improving your position health. However, extreme moves can still trigger liquidations if leverage is too high.

Can I use USDT to trade inverse Bitcoin futures?Typically not. Inverse futures require margin in the base asset — so for BTC inverse contracts, you must use BTC as collateral. USDT cannot be used for margin in these contracts, though it may be used in the same exchange for other products.

Why do some traders prefer inverse contracts despite the complexity?Some experienced traders favor inverse contracts to accumulate more BTC through profitable shorts in bear markets. Additionally, certain arbitrage strategies between spot and futures rely on the structure of inverse pricing dynamics.

Are liquidation prices calculated differently between inverse and linear contracts?Yes. Due to the non-linear PnL mechanics, liquidation price formulas for inverse contracts account for changes in the base asset’s value relative to the quoted price. Linear contracts use simpler arithmetic based on stablecoin-denominated margins and payoffs.