To trade cryptocurrencies, crypto traders employ a variety of methods. Each of these methods works differently, and not all of them are appropriate for everyone. While some methods, such as spot trading, are widely used by nearly every crypto investor, others, such as futures trading, are less common.
Today, we’ll look at crypto futures trading and how it works. We will also tell you whether it is a suitable trading type for you.
What Exactly Is Crypto Futures Trading?
Crypto futures trading is a type of trading that is similar to futures trading in traditional markets. It entails the use of futures contracts, which are legal agreements to buy or sell an asset at a predetermined price in the future.
In the crypto world, it means agreeing to buy a specific cryptocurrency at a specific price at a future date, regardless of the price at that time.
The agreed-upon time span can range from 24 hours to several years. Because the parties involved in the transaction usually base their trades on speculation about how the asset price will perform in the future, the term futures trading was coined.
Whatever happens, the trade is carried out on the agreed-upon date and time, and usually only benefits one of the two parties involved. Futures trading is available on exchanges such as Kraken, BitMEX, Bybit, and eToro, which are among the best crypto exchanges for US residents.
What is the Procedure for Trading Crypto Futures?
Futures traders typically speculatively predict how the price of a crypto asset will perform in the future. Their conclusion may be based on fundamental analysis using some metrics or technical analysis, or both, on which they base their prediction that the asset will perform in a particular way on a specific day.
A trader, for example, may open a futures short position on a contract to sell Bitcoin at a specific price on October 23, 2022. A trader who intends to execute the transaction will open a long position on the contract.
If the agreed-upon price is $30,000 per bitcoin and the current price is $23,000, the seller will profit if the price of bitcoin remains below $30,000, while the buyer will lose.
On the other hand, if the price reaches $45,000 on October 23, they will lose money while the buyer will profit. Only by entering the opposite trade to the one you initially opened can futures contracts be canceled before the agreed date. When the agreed-upon date arrives, the contract must be fulfilled.
Futures traders may borrow funds from the exchanges on which they trade to increase the size of their trades in order to increase their potential gains. This is known as leverage, and it is expressed in multiples of the original trade size; for example, for a trade X, the leverage can be 10X, 20X, 50X, or even 100X, depending on the exchange.
Borrowing to increase the size of a trade should be avoided if the trade does not favor you. You will be liquidated, and your funds will be lost forever, so it is a high-risk endeavor.
What Makes It Unique From Other Types of Crypto Trading?
Futures trading differs significantly from other types of trading. Spot trading or peer-to-peer crypto trading involves exchanging one asset (or currency) for another, whereas futures trading involves only one asset. It is also distinct in that the trader is not directly trading the cryptocurrency market; rather, it is a transaction between a seller and a buyer.
Another significant distinction between futures trading and others is that the transaction does not occur instantly or based on the current price of an asset. Instead, it is based on a hypothetical future price. In fact, the trader is not required to own or handle the cryptocurrency on which he is speculating.
Who Should Engage in the Use of OTC Trading for Crypto?
Futures trading is based on asset price speculation rather than the actual trading of assets. A thorough understanding of both market fundamentals and the fundamentals of the specific asset is essential for success in this.
This is sometimes used in conjunction with technical analysis to produce an accurate forecast of an asset’s future performance. Even though no trader ever wins every trade, having this knowledge will greatly increase your chances of succeeding in futures trading.
As a result, futures trading is better suited to seasoned investors who have a solid understanding of the market and are capable of forecasting price movements with some degree of accuracy. Even though futures trading is alluring, if you don’t have a lot of industry experience, you should stay away from it.
What Are The Risks Involved In Trading Futures?
Trading cryptocurrency futures can be profitable if done correctly, but there are also big risks involved. For instance, using leverage carries significant risk because it increases both your potential for profit and your potential for loss. With the cryptocurrency market being so volatile, this is even more serious.
You must set aside a sum of money known as initial margin as insurance in case you lose the trade before an exchange lends you money to use as leverage to trade futures. This is kept in the exchange’s possession, and you can only get access to it after making a profit on the trade and returning the borrowed money.
The capital you put up as the initial margin will be permanently lost if you lose the trade because the exchange will automatically liquidate your position and close the trade. Because of this, novice traders should avoid using leverage.
Should You Invest in Cryptocurrency Futures Contracts?
Crypto futures trading, like any other type of crypto trading, can be profitable, and many people trade futures contracts full-time. However, doing so safely and with more gains than losses takes time and experience. Without this, you may have already lost before you begin.
If you’re interested in futures trading but are new to the crypto space, it may be beneficial to hang out and learn more about the market before getting involved. Investigate what affects the cryptocurrency market in general and the cryptocurrency you want to trade in particular.
This way, when you stake your money, you can make informed trading decisions and record more wins than losses.
This is not monetary guidance. A licensed financial adviser can provide you with the best advice based on your needs and risk tolerance if you’re interested in making any type of investment.
