Futures contracts give investors access to cryptocurrencies (like Ethereum or Bitcoin) without requiring them to own the basic asset. It allows investors to speculate on the potential value of assets, similar to stock indexes or commodity-based derivatives contracts. Thus, the value of crypto futures contracts is determined by digital assets, such as Bitcoin or Ethereum.
As the crypto futures contract terminates, the transaction is settled with cash instead of the digital asset.
About Crypto Futures
The main benefit of trading cryptocurrency futures is that it can shield investors from unfavorable market conditions. Short selling is a strategy used by traders to capitalise on price differences by selling high and buying low. In essence, bitcoin futures contracts allow market players to make money regardless of how the price of the underlying (basic) asset changes.
You can trade crypto futures anytime around the clock. Before investing, traders must thoroughly understand the fundamentals of crypto futures due to the significant volatility of derivatives trading.
How Do Futures Contracts Operate?
While online assets face various issues, such as high volatility and bad press, some traders take advantage of this volatility.
The most important thing to remember while trading cryptocurrency futures is that you don’t hold the cryptocurrency; instead, you take challenges on price swings.
Fundamentals of Trading Crypto Futures
Traders often become familiar with the fundamental ideas involved in crypto derivatives to comprehend better the advantages these investment instruments offer.
Here are a few terms to help you on your path to being a profitable trader of cryptocurrency derivatives.
The futures market is particularly capital-efficient because traders are attracted to it by the allure of leverage.
For instance, you would require thousands of dollars to purchase 1 BTC on the market. Leverage allows you to open a long BTC trade with a futures contract at a quarter of the price.
Contrarily, spot trading does not allow for the use of leverage. Thus if you only have 50 Bitcoins in your account wallet, you can only buy that much.
- Margin Conditions
A margin requirement is a necessary margin required to initiate trading in the futures contract. When using a futures trading account, it is the amount of the market valuation of a futures position that must be backed by BUSD or another type of collateral.
On the other hand, the maintenance margin is the least amount needed by investors to keep their trading positions open. Margin utilization is calculated with the help of ongoing maintenance margin checks. An open position is liquidated as soon as the traders reach their maintenance margin.
- Funding Rates
Cryptocurrency contracts do not mature like conventional futures contracts. As a result, exchanges need a method known as the funding rate that ensures index prices and futures prices consistently merge.
The price difference between the futures and spot markets is used to calculate funding rates. Investors will either pay or get funding payments depending on their open market positions, which could be detrimental.
For example, financing rates could spike in an overheated bull market and make it expensive for traders to keep long positions.
Futures Trading: Pros and Cons
Lucrative activities like futures trading have their fair share of benefits and drawbacks. The benefits and drawbacks of trading these crypto derivatives are listed below.
- You can bet against the market by trading bitcoin futures. To benefit from the movement of the market, you can take either a long or a short position.
- Leverage allows traders to invest significantly in an asset for a small portion of the entire cost.
- Traders or users generally use futures trading as a spot market buffer, which is beneficial for all investing strategies.
- The extreme fluctuation in the crypto market can either help or hinder traders because the outcome of an investment is not specific.
- Leverage exposure can lead to significant losses, particularly for novice traders without a solid risk management strategy.
Trading cryptocurrency derivatives is a practical technique to make predictions about the value of digital assets in the future. Crypto futures can be financially rewarding for individuals with the right information and a reliable risk-management plan.