FxBrokerReviews.org – Although there are numerous ways to gain exposure to cryptocurrencies, futures trading is one of the most well-liked and practical methods. You can learn everything you need to know about futures trading here. It can offer superior prospects in that situation compared to spot trading and options trading. It can initiate long and short positions on various digital currencies. Here is everything you require to know.
Futures trading is a way to speculate on an asset’s price, including all the costs of cryptocurrencies, without owning it. The future price of a digital currency can be predicted by traders using cryptocurrency futures, just like with commodities or stock futures. Undoubtedly, Bitcoin futures are the most widely traded form of cryptocurrency futures contracts.
How Does Futures Trading Work?
You couldn’t identify the difference between conventional trading and cryptocurrency futures trading if you observed the procedure on a platform for crypto exchange. This is primarily due to traders opening long and short positions and using appropriate risk management strategies in both scenarios.
Nevertheless, because futures contracts only work with their price action and not their underlying securities, they are very distinct from spot trading. Futures are far more elegant and manageable without physical assets. Additionally, they make high-leverage margin trading possible.
What Is A Futures Contract?
Futures contracts initially made sense for various commodities, such as food, energy, and metals. They quickly moved past these practical considerations to seize control of all financial markets, including cryptocurrency. Nowadays, futures, often with a monthly expiration date, are used in the majority of commodity price quotes that you find on financial portals.
In its simplest form, a futures contract is a contract between two parties to purchase or sell an asset, such as digital money, at a fixed price and on a given date. The agreement follows an underlying asset, such as a stock, commodity, or digital currency. Essentially, it is a wager on how prices will change in the future.
For instance, you might be interested in starting a long position on the cryptocurrency by purchasing a Bitcoin futures contract with a monthly expiration date if you believe that the Bitcoin (BTC) price will rise by the month’s end. Alternatively, if you think the price of Bitcoin will increase, you will go long. The two parties to the deal settle on the contract’s expiration date, which is then considered closed.
A futures contract must have an expiration date to be considered valid, although there is a subclass of bitcoin futures known as perpetual contracts. Perpetual contracts are distinct from the rest since they do not expire. They act precisely like conventional futures but without expiration or settlement.
A perpetual contract’s price closely tracks and trades around the spot price of a cryptocurrency. The funding rate, which determines how often longs and shorts make payments to one another according to the state of the market, is the primary mechanism that makes perpetual contracts viable.
Types Of The Crypto Futures Contract
Crypto traders have access to a variety of futures contract types. It’s important to note that only some platforms offer the varieties mentioned above, so be careful to pick the appropriate futures exchange.
Crypto Futures Contract: Standar
Regular cryptocurrency futures include expiry and settlement and all the other features of a typical futures contract from established markets. The first futures trading platforms to introduce Bitcoin futures contracts were the Chicago-based CME Group and CBOE in December 2017. This was just one of many factors that drove the price of BTC to a record high, which remained until it surpassed $20,000 in 2020.
As seen on its Bitcoin Futures Calendar, CME now offers several Bitcoin futures with various expiration dates. At expiration, all contracts are paid in U.S. dollars. While CBOE decided to stop offering Bitcoin futures contracts elsewhere, it would undoubtedly resume them shortly, given the burgeoning interest in cryptocurrencies.
On the other hand, several cryptocurrency exchanges do offer conventional futures contracts. Most provide quarterly Bitcoin futures, frequently traded in U.S. dollars, like Bybit, FTX, Deribit, and Binance. They are excellent for swing trading and are often settled every three months.
Futures With Physical Delivery
Futures with physical delivery are another bitcoin futures with expiration dates. Bakkt, a company founded by Intercontinental Exchange (ICE), the New York Stock Exchange parent company, was the first to introduce them (NYSE). The fact that cryptocurrency is distributed during the settlement process is the only distinction between these futures and the conventional ones mentioned above.
Presently, Bakkt exclusively provides Bitcoin futures with physical delivery, which means that it distributes Bitcoin to customers who purchased Bitcoin futures on the expiration date. This strategy seeks to increase Bitcoin circulation by acting as a futures contract with a cash settlement.
Another well-liked variety of cryptocurrency futures is perpetual contracts. Perpetual contracts immediately gained popularity on BitMEX because they are independent of the expiration date. Major cryptocurrency exchanges like Bybit, FTX, and Binance soon followed suit.
Financing is the main factor that keeps perpetual contracts as close to the spot price as possible. At specific times, traders compensate one another based on their available positions. Who pays what and who gets paid depends on the disparity between the perpetual contract and spot prices. As a result, traders with long positions pay short positions when the financing rate is positive and vice versa when it is negative.
The financing payments are made every eight hours, and the perpetual contracts are exchanged in USDT and other stablecoins, which is essential information for many traders.
Although the cryptocurrency perpetual futures market has expanded quickly, there is still an opportunity for growth in terms of trading volume compared to traditional futures exchanges.
Even while the trading volume for perpetual futures has plummeted, they have not been as significantly impacted by the sharp decline in crypto prices in 2022. Coinglass shows that the typical futures volume is between $50 billion and $200 billion.
The big and decentralised exchanges will continue competing fiercely for market share in the lucrative field of cryptocurrency futures.
Commodity Vs Crypto Futures
The futures contracts for bitcoin are very similar to those for traditional financial markets’ futures. This shouldn’t surprise you as the U.S. Commodity Futures Trading Commission (CFTC) classifies Bitcoin as a commodity.
The underlying assets are not involved in futures on cryptocurrencies or commodities; instead, they are the value of those traded assets. The prices of the underlying assets and derivatives are typically very close to one another. There are futures from both exchanges that have the same settlement and expiration dates.
Perpetual contracts, one type of bitcoin future, differ from commodities futures because they don’t have an expiration date or a settlement date. Additionally, since digital assets are much more volatile than commodities, crypto futures are typically more volatile than commodity futures.
Another significant distinction is that many commodity futures are traded for business purposes rather than for financial gain. For instance, businesses that manufacture goods or provide transportation services would be interested in purchasing oil at the current price but would buy oil futures with future delivery.
Futures Vs Options
The trading of Bitcoin options and futures is also possible on many platforms.
Futures contracts can be helpful for speculative traders. Still, they are handy for people and businesses who deal with the underlying assets since they let them insure against unforeseen market turmoil and fluctuations as well as operational and business hazards.
Bitcoin miners provide the most typical illustration. They make money from the Bitcoin they mine and sell, but even though their expenses are typically fixed and paid in fiat, the value of bitcoin might vary considerably.
If Bitcoin’s price falls sharply in the future, miners may find it challenging to cover their fixed expenses, endangering their ability to continue operating.
Miners can use the futures market to locate prospective purchasers for their Bitcoin at levels that will enable them to continue making a profit and mitigate this risk. Contrarily, option contracts have fewer downside risks, so they are more suited for speculative traders.
Also read: Crypto Options Trading And How To Gain Profit
Benefits Of Futures Trading
Futures contracts for cryptocurrencies have gained much traction for a good reason. Consider the following benefits of cryptocurrency futures:
- Useful. Even for beginners, trading futures is more straightforward than trading actual cryptocurrencies, which calls for access to a liquid market and possession of a secure digital wallet. This is the main factor driving the two to three times higher trading volume in crypto futures than in spot trading.
- Greater potential earnings. Gains are often more significant when using leverage to trade crypto futures. Setting the influence on many platforms to 100x, you may open a position worth $1,000 with just $10 in initial money. You should be aware, nevertheless, that using leverage also entails more significant loss risks.
- Versatile trading tactics. Trading crypto futures is a far better way to apply trading methods than trading real cryptocurrencies, mainly intraday trading. Additionally, you can go short without any obstacles with crypto futures. There are more opportunities for you to use various trading tactics to increase profits.
- No financing rate. Futures do not have a financing rate, and prices are frequently in contango, which means future prices are more significant than the current spot prices. This is a substantial difference between futures and perpetual futures. By combining a long position in the spot market and a short one in futures, cash and carry arbitrage, a market-neutral technique, can take advantage of this opportunity. Despite the state or instability of the market, the futures price coheres with the spot market price on the day of settlement, producing relatively risk-free gains.
Risks Of Futures Trading
Several industry professionals think the underlying crypto economy is too young to support a futures market. These detractors claim that Bitcoin’s volatility may spread to other areas of the futures market. However, no serious incidents have been recorded by crypto futures platforms yet because, unlike ordinary crypto exchanges that keep clients’ cryptocurrency holdings, most are not vulnerable to cyber assaults. For instance, futures trading on Bybit is simple and practical.
Although higher-than-recommended leverage is alluring to newcomers, there are hazards associated with market volatility, a 24/7 market, and inadequate futures trading tactics borrowed from traditional markets without any changes.
Things To Think About Before Trading Futures
Despite certain similarities, futures trading is not the same as traditional trading. Here are a few significant factors to consider:
The critical component of margin trading, which is now available on most futures trading platforms, is leverage. Trading using leverage can increase potential earnings, but the dangers are proportional to the amount of leverage used. Bybit and Binance offer up to 100x leverage for their perpetual contracts. However, most cryptocurrency exchanges only offer up to 50x leverage. For experienced traders, trading with ample leverage may result in gains, but there is still a danger that the position will need to be liquidated.
Beginners should refrain from using ample leverage while trading futures; however, a low degree of leverage might work. The margin needed for trading is determined by the leverage option chosen. If a trader decides 10x leverage, for instance, the position will only contain 10% of his own money, and the rest will be borrowed. The exchange itself or traders lending money in exchange for interest provide it.
To allow traders to rapidly swap their assets for cash without too much price slippage, traders and investors rigorously examine a new asset’s liquidity to measure market stability, speed of operation, market flexibility, and financial stability.
There are three significant indicators to gauge liquidity while trading futures. Asset, exchange, and market liquidity are all included. The general condition of purchase and market, as well as the number of buyers, sellers, makers, and takers, should be considered by traders.
Trading cryptocurrency futures is a great way to protect against traditional assets or the potential for a significant decrease in the value of the underlying cryptocurrency. Institutional investors prefer Bitcoin futures as a hedging strategy. Since the futures contract has an established price for the expiry date, trading Bitcoin futures protects you from experiencing the significant BTC price losses experienced in the spot market.
Cryptocurrency futures also let you diversify your investments in addition to hedging. Diversification is widely acknowledged as one of the most vital money management strategies available to traders and investors. To build a well-diversified futures portfolio, you can open numerous positions in Bitcoin (BTC), Ethereum (ETH), Chainlink (LINK), and many other tokens. Doing this can lessen the chance of exposing yourself to a single asset whose value might suddenly drop.
The extreme volatility of trading cryptocurrencies and their associated futures is among the most crucial things to understand. Although this is primarily portrayed as a risk, there are additional opportunities. This is especially true for short-term traders who love to make predictions about sudden market changes. Compared to the F.X. or stock markets, cryptocurrencies still have a modest market share. Digital assets are, therefore, susceptible to wild changes caused by whales or other industry-related events.
Date Of Expiration
Consider trading standard cash-settled cryptocurrency futures. In that situation, it is essential to pay attention to the expiration date because it is then that the contract will be settled, and you will receive your cash or stablecoin funds. You have until the expiration date to sell any open futures contracts. Consequently, registering a profit or loss depends on how the spot price changes.
Despite being a different derivative, cryptocurrency options are still less common than futures. In an option contract, the buyer has the right, but not the responsibility, to buy the underlying asset in the case of a call option or sell it in the case of a put option at a fixed price within a specific time frame.