Perpetual futures contracts are a means for speculating on prices which has recently gained a lot of popularity in the crypto world.

In fact, $1.7T in cryptocurrency derivatives were traded in the third quarter of 2020, with a large majority of that volume consisting of perpetual futures.

For Muslim investors, the obvious question that suggests itself regarding theses derivatives is: are perpetual futures halal or haram?

What Are Futures?

A futures contract is an agreement to buy or sell something at a predetermined price at a specified time in the future.

An example of a futures contract is:

I agree to deliver to you and you agree to buy from me 1 Bitcoin for $50,000 in 1 month (otherwise known as the settlement date).

This means that after 1 month, on the settlement date, you have an obligation to buy from me and I have an obligation to deliver to you 1 Bitcoin for the price of $50,000.

What Are Perpetual Futures?

A perpetual futures contract is a special type of futures contract, in that it doesn’t have a settlement date.

So one can hold on to their position in the futures contract (long or short) for as long as they like.

Since the contract can be settled at any time, the price of the perpetual futures contracts is designed to always match the current price of the underlying asset.

Why would anyone buy or sell crypto via a perpetual futures contract rather than just directly trading the crypto itself?

1. Every future contract has two sides. One side is betting the price goes up and the other is betting the price goes down. So with a perpetual futures contract, you have the opportunity to profit not only when you think the price is going to go up, but also when you think the price is going to go down.
2. Often, trading fees are lower and liquidity is higher for futures.
3. Leverage. With a futures contract, you only need to deposit a little amount of money to gain access to the price action of a large amount of the underlying using leverage. For example, with Binance, you're able to leverage your Bitcoin position up to 125 times what you deposit in cash.

Are Perpetual Futures Halal or Haram?

I see the following major problem with perpetual futures: Cash Settlement.

Cash Settlement means when the futures contracts are settled, no underlying asset is exchanged. Only money is exchanged. The party that lost the price direction bet pays the party that won it.

In other words, Perpetual Futures are a zero-sum financial instrument that meet the definition of a financial bet or Al-Maysir.

On Al-Maysir, Allah SWT says [translated into English]:

“O you who believe, intoxicants, Al-Maysir (gambling), sacrificing for idols and making decisions based on games of chance are sicknesses from the work of Satan, so avoid these things so you may prosper. Satan desires to create enmity and hatred among you through intoxicants and Al-Maysir and to stop you from praying and remembering Allah. So will you abstain from these things?”

English translation of The Holy Quran 5:90-91

Since I find Al-Maysir in Perpetual Futures contracts, I see them as haram to deal with.

As always, Allah knows best.

Final Thought

Let me tell you a little secret that the casual observer may not know:

You know how I said futures contracts have two sides, one side’s gain is the other side’s loss?

Many times, the other side in the futures contract is the exchange itself.

In other words, the party that is entrusted with communicating the price also often has a vested interest in what that price is.

So how confident are you that the exchange that is betting against you wouldn’t manipulate the price which it controls for a brief moment just to wipe out your account and the accounts of others like you that it's betting against?

When you’re looking at a price chart on a certain exchange and you notice a sudden spike or drop followed by a quick recovery and the whole thing took just a few seconds, just know that a lot of leveraged positions just got wiped out and whether or not the exchange did that on purpose is something you’ll never know.