How does settlement work for a crypto futures contract?

Settlement Mechanism Overview

1. Crypto futures contracts are settled either in cash or through physical delivery depending on the exchange’s design and the underlying asset’s characteristics.

2. Cash-settled contracts do not involve the actual transfer of the cryptocurrency; instead, the final profit or loss is calculated based on the difference between the entry price and the settlement price, paid in stablecoin or the exchange’s native token.

3. Physically settled contracts require the buyer to receive the underlying digital asset and the seller to deliver it upon contract expiration or exercise.

4. Most major derivatives platforms like Binance Futures, Bybit, and OKX predominantly use cash settlement for BTC and ETH perpetual and quarterly contracts.

5. Settlement prices are often derived from a composite index that aggregates data from multiple spot exchanges to prevent manipulation and ensure fairness.

Perpetual vs. Expiring Contracts

1. Perpetual futures contracts have no fixed expiry date and remain open until manually closed or liquidated.

2. These instruments rely on funding rate mechanisms to tether their mark price closely to the underlying spot index.

3. Funding payments occur at regular intervals—typically every 8 hours—and flow from longs to shorts or vice versa depending on whether the mark price trades above or below the index price.

4. Expiring contracts terminate on a predetermined date, triggering automatic settlement using the final reference price.

5. The final settlement price for expiring contracts is usually the time-weighted average price (TWAP) over the last 30–60 minutes before expiry, sourced from selected spot markets.

Mark Price and Index Price Alignment

1. The mark price is a synthesized value used to calculate unrealized PnL and determine liquidation events, preventing unfair liquidations during short-term volatility spikes.

2. It incorporates the spot index price along with the basis—the spread between futures and spot—to reflect fair market expectations.

3. Exchanges apply decay models or moving averages to smooth out noise when computing the mark price.

4. Discrepancies between mark price and last traded price can widen during low liquidity or flash crash conditions, prompting tighter margin calls.

5. Some platforms introduce capped deviation thresholds beyond which trading halts or price feeds are paused to preserve integrity.

Liquidation and Auto-Deleveraging

1. When a trader’s margin balance falls below the maintenance margin level, the position enters liquidation.

2. Liquidation engines execute forced closures at the best available price within the order book, often resulting in slippage during high volatility.

3. In extreme scenarios where insufficient liquidity exists to absorb all liquidations, auto-deleveraging (ADL) may activate.

4. ADL selectively reduces profitable positions held by users with higher leverage and longer profit history, prioritizing those with larger unrealized gains.

5. Each exchange publishes transparent ADL ranking logic, typically sorting by leverage, profitability, and position age.

Common Questions and Answers

Q: What happens if my position is liquidated but the market reverses immediately afterward?Positions are closed at the prevailing price during liquidation execution; no retroactive adjustments occur even if price recovers moments later.

Q: Can I withdraw funds used as initial margin before contract settlement?Yes, unused margin remains accessible while positions are open, provided the remaining balance satisfies maintenance requirements.

Q: Do funding rates apply to expiring futures contracts?No, funding rates are exclusive to perpetual contracts; expiring contracts accrue no periodic funding obligations.

Q: Is the settlement price always identical to the last trade price on the futures market?No, the settlement price is derived from external spot indices and time-weighted calculations—not internal order book activity.