A futures contract is an agreement between a buyer and a seller whereby both agree to deliver a specific asset at a predetermined price and date. Though a relatively nascent market, crypto futures trading is an exciting and potentially profitable way to trade crypto. This blog will give you the lowdown on futures trading in crypto. Let’s dig in.
Basics of futures trading
The usage of futures trading increased immensely with the growth of future contracts in commodities such as corn, coffee, and cotton. A future contract in commodities is an agreement between two parties to buy or sell a specific quantity of a commodity at a predetermined price, on a future date. The contract is traded on a commodity exchange like the Chicago Mercantile Exchange (CME) and provides a way for buyers and sellers to hedge against price changes. The delivery and payment are settled on the contract’s expiration date.
Crypto futures trading is a type of derivatives trading that involves trading contracts that obligate traders to buy or sell an asset at a certain price at a specific future date. The asset being traded is usually a crypto, such as Bitcoin, Ethereum, and Litecoin.
The contracts are traded in lots, representing the quantity of the underlying asset that will be purchased or sold at a specific time. For instance, a trader buying a futures contract is betting that the price of the underlying asset will rise. Conversely, while selling a futures contract, traders wager that the underlying asset’s price will fall.
How does futures trading work?
Futures trading works like other types of derivatives trading. To begin with, traders need to open an account with a futures trading platform or exchange and start trading futures contracts.
Traders can choose to buy or sell a futures contract, depending on their sense of the market’s direction. If they believe that the price of the underlying asset will go up, they can buy a futures contract. On the other hand, if they think the price of the investment in question will go down, they can opt to sell a futures contract. Once the contract is opened, traders will need to track the market to ensure that the asset’s price is moving in the direction they expect.
On the expiry of the contract, the trader will be able to close out the position, registering profit or loss as the case may be.
Different types of crypto futures contracts
Standard futures contracts
They are similar to regular futures contracts in traditional markets and have features like expiry and settlement. In fact, the launch of Bitcoin futures by the US-based CME Group in December 2017 is a classic example of a standard futures contract.
Futures with physical delivery
These contracts also come with expiry dates like standard futures contracts. As the name implies, the distinguishing feature is that crypto is delivered to the buyer during the settlement process.
Perpetual contracts
Unlike the first two types, these do not come with an expiration date. Some popular exchanges provide crypto traders the option to use perpetual contracts. Given the lack of an expiration date, traders can keep their buy or sell option open if they are willing to make margin payments.
Crypto futures trading: Advantages and disadvantages
Advantages of futures trading
Crypto futures trading offers several advantages for traders. First, it allows traders to take advantage of price movements without owning the underlying crypto. Secondly, futures trading is a highly liquid form of trading, which means traders can enter and exit positions quickly. Liquidity makes it easier for traders to manage risk, as they can quickly close out positions if the market moves against them. Last of all, futures trading allows traders to leverage their positions. To elaborate, traders can use a relatively small amount of capital to take a significant position in the market, allowing them to magnify their profits. However, it also increases their risk.
Disadvantages of futures trading
Futures trading in crypto comes with its share of downsides as well. It is a risky form of trading, as traders can lose more money than they initially invested. Further, traders need to understand the mechanics of futures trading. What’s more, the cost of trading futures contracts can be high, as traders need to pay commissions and fees when they open and close positions. Finally, crypto prices are volatile, putting traders at risk of loss if the market moves against them.
What distinguishes futures trading from other types of crypto trading?
Crypto futures trading is distinct from other modes of crypto trading in more ways than one. First, it is a derivatives market, meaning traders are trading contracts rather than the underlying asset. For example, a trader need not own a bitcoin to speculate on the direction of the coin’s price. The second difference concerns the obligatory nature of the contract. Traders entering into a futures contract to buy or sell a certain quantity of crypto are bound to honor the contract, no matter if they made a profit or incurred a loss. It would be worthwhile to discuss some of the significant differences between crypto futures and other forms of trading. Let’s dig in.
Crypto futures vs. commodity futures
Certain types of crypto futures, like perpetual contracts, differ from commodity futures as they don’t come with expiry. Moreover, due to the inherent volatility of digital assets, crypto futures tend to be more volatile than commodity futures.
As commodities such as oil have a practical utility, futures contracts tied to them are often traded not so much for speculation as in the case of crypto futures.
Crypto futures vs. crypto options
In a crypto futures contract, traders agree to buy or sell a specific crypto at a specific time in the future for a predetermined price. Since the contract has an expiry date, it is mandatory to buy or sell the underlying asset at a price agreed upon.
Like crypto futures, options contracts are based on the underlying asset’s value. However, the difference is that the holder of the options contract is under no obligation to buy or sell the asset. Call and put options are a common type of options contract.
Crypto futures vs. spot trading
Spot trading is trading one asset class for another. Futures trading, on the other hand, concerns a single asset. In futures trading, there is no direct trade involved as in spot trading, but rather an agreement between a buyer and seller.
Where to trade crypto futures?
Thanks to the popularity of crypto as an investment class in recent years, the demand for ways to trade the digital asset has soared. Some of the leading global platforms in the traditional and crypto-specific genres currently offer trading in crypto futures. Some well-known platforms in this space are Chicago Mercantile Exchange (CME), TD Ameritrade, eToro, Kraken, and BitMEX.
Conclusion
Crypto futures trading involves trading futures contracts that obligate traders to buy or sell crypto at a specific price at a future date. It enables traders to speculate on the direction of the price of crypto without owning it. However, traders must thoroughly understand futures trading to manage the associated risk effectively. If you’re looking for a potentially profitable way to trade crypto, futures trading may be worth considering. As always, do your research and understand the risks before you start trading.
FAQs:
How do I start crypto futures trading?
To start crypto futures trading, research reputable exchanges, create an account, complete necessary verifications, deposit funds, and learn risk management strategies.
What is an example of futures in crypto?
An example of a crypto futures contract is Bitcoin futures, where traders speculate on the future price of Bitcoin.
How do you trade in futures and options in crypto?
To trade futures and options in crypto, open an account on a supported exchange, choose the desired contract, set parameters, and execute trades based on your strategy and market conditions.
What is leverage in crypto?
Leverage in crypto refers to borrowing funds from an exchange or platform to amplify your trading position, allowing you to control a larger position than your initial capital.
Is crypto futures trading profitable?
Futures trading can be profitable, but it is important for crypto traders to understand the risks involved. Equally important, traders need to familiarize themselves with the mechanics of futures trading and the terms of their contracts.
What are the pros and cons of crypto futures trading?
Futures trading allows traders to take advantage of price movements without owning the underlying crypto. Essentially, futures enable traders to take a large position in the market with a small amount of capital. Moreover, traders can manage risk by swiftly closing out positions if the market moves against them. However, it is difficult to manage risk without a good knowledge of the market.
How long does it take to learn crypto futures trading?
Learning futures trading requires time and effort. Traders should familiarize themselves with crypto exchanges and platforms that offer futures trading to learn about the fees and commissions involved. Traders should develop a trading strategy and practice with a demo account before trading with real money. A thorough understanding of the futures market will help traders hone their skills before they take the plunge.
