What Is Delivery vs Cash Settlement?
Futures contracts can be settled in two ways at expiration: physical delivery (the actual underlying asset changes hands) or cash settlement (the difference between the contract price and the settlement price is paid in cash or stablecoins). Most crypto futures use cash settlement for simplicity.
How Delivery vs Cash Settlement Works
In physical delivery, the short must deliver the underlying asset and the long must pay the contract price. In cash settlement, only the net difference is exchanged. CME Bitcoin futures use cash settlement based on the CME CF Bitcoin Reference Rate. Some crypto platforms like Deribit settle options in the underlying (BTC or ETH).
Why It Matters for Traders
The settlement method affects basis trading and arbitrage strategies. Physical delivery creates a "delivery squeeze" risk where shorts must obtain the underlying asset. Cash settlement removes this risk but can lead to price manipulation of the settlement index. Understanding which settlement method your contract uses is essential for managing expiration risk.
