Introduction to Futures Trading in Crypto
Futures trading in cryptocurrency is a relatively new concept, with the launching of Bitcoin Futures trading for the first time in December 2017. It is the concept of possessing a contract created from an underlying asset – in this case, Bitcoin or any other crypto asset – rather than the actual crypto asset. The investor or trader owns the cryptocurrency Futures contract, while the exchange handles the custody and settlement of the actual asset. It has recently been a popular way for traders and investors to stay invested in cryptos without having to go through the inconveniences of purchasing and holding these assets.
Comparison of Crypto Futures with Other Trading Methods
|Crypto Futures vs Spot Trading
|When opposed to spot trading, crypto futures trading allows access to leverage, which boosts the profit potential of trades.Spot trading, on the other hand, allows you to possess your asset, while Futures trading allows you to own a contract that is produced from an underlying asset.
|The sole resemblance is that spot trading involves trading the asset directly, whereas crypto Futures trading involves trading a derivative of the underlying crypto asset. As a result, they are often based on the same asset.
|One of the main differences between crypto Futures trading and spot trading is the benefit Futures provide – i.e. leverage. This leverage is what allows speculative traders to maximize their profit potential through crypto trading.
|Crypto Futures vs Margin Trading
|The upside of crypto Futures is that because they are contract-based, the crypto Futures markets are significantly more liquid than the others. Margin trading, on the other hand, allows you to truly own the crypto asset by utilizing the leverage provided by the exchange.
|Crypto Futures trading and margin trading are similar in that both are forms of giving leverage to the deal in order to bet on the price of the asset.
|The key difference between cryptocurrency Futures and margin trading comes in one distinct way. One, cryptocurrency Futures allow a range of multiples of leverage that a trader can access while cryptocurrency market trading generally has a fixed leverage amount.
|Crypto Futures vs Options Trading
|The key advantage of crypto Futures over crypto options is that options, by definition, are a wasting asset and hence lose value over time if the underlying does not change. In the case of cryptocurrency Futures, a trader loses money only if the trade goes against them.The advantage of options trading is that the margin requirement is even smaller than that of crypto Futures, and options may also be used to profit from a sideways or rangebound market.
|The similarities between cryptocurrency Futures trading and cryptocurrency options trading is that both are derivative contracts produced from the same asset and can be traded.
|The key distinction between crypto Futures and crypto options trading is the method used. Going long or short on cryptocurrency futures is a straightforward notion.However, using options, traders can buy calls and put options based on the direction they believe the underlying asset will take, as well as develop techniques to hedge their risk and increase profitability.
Benefits of Trading in Crypto Futures
Let us look at some of the biggest benefits of trading crypto Futures:
- Simplicity & Convenience: One of the most significant advantages of crypto futures trading is its simplicity. It allows you to simply invest in crypto assets, speculate on their price movements, and benefit from them without actually owning and safely storing the cryptocurrency asset.
- Leverage: The concept of leverage is one of the most important and appealing aspects offered by cryptocurrency futures. Leverage is the ability to manipulate a significant contract value obtained from an underlying asset with a small quantity of capital.
- Higher Profit Potential: Understanding the notion outlined above, leverage is what allows traders to generate greater profits from speculating with cryptocurrencies Futures contracts with the minimal cash they have, making it an incredibly appealing option for market veterans.
- Safety: Crypto Futures markets can also be deemed safer, particularly for traders, because crypto Futures contracts have position and price limitations in place, allowing traders to lower their risk exposure.
- Flexibility: Crypto Futures contracts enable traders to be far more versatile in their trading tactics. One of the most basic examples is that a trader in the crypto Futures market can easily go short on an asset if they believe the value of that coin will fall in the near future. In the case of spot or margin trading, this would not have been as simple. This flexibility also allows traders to implement scalping methods in the market, which are ineffective and inefficient in the spot market.
- Price Accuracy: Crypto Futures contracts are eternal in nature, which means they have no expiration date, unlike standard Futures contracts. As a result of the nature of crypto futures, these contracts can trade very close to actual spot values with little deviation. Traditional futures contracts tend to trade at a premium or a discount based on market sentiment, however, in the case of perpetual crypto futures contracts, there is a concept of funding rates that assures that Crypto Futures contracts trade in accordance with spot pricing.
- Hedging Tool: Long-term investors in the crypto markets can also employ Crypto Futures to limit their downside risk by taking an opposite position in the Futures against their holdings. In this manner, the short-term downside risk is decreased, and you can even profit from it by using Futures contracts.
Risks or Drawbacks of Crypto Futures
- Leverage: While leverage is one of the most significant advantages of crypto Futures contracts, it can also be a double-edged sword. Newer traders in the market are vulnerable to this and may over-leverage themselves in the market, resulting in a total loss of capital if the deal goes against them and they are liquidated out of the market by the exchange.
- Ownership: Because there is no ownership of the underlying crypto, investors who use crypto Futures to engage and invest in crypto assets cannot reap the economic benefits of staking and voting. This might also be viewed as a negative.
To summarise, crypto futures trading has a lot of advantages and cons. Before entering this type of market and trading – where there is a risk of capital wipeout but can provide rewards in excess of everything else – a trader or investor must conduct a thorough study. The rewards, however, far outweigh the hazards, and with correct education and understanding, it becomes a lot safer and more profitable as well.