Crypto traders use different methods to trade cryptocurrencies. Each of these methods works differently and not all may be suitable for everyone. While methods such as spot trading are quite popular as almost all crypto investors use them, others, such as futures trading, are not very common.
Today we are going to cover crypto futures trading and how it works. We will also reveal whether it is a suitable trading type for you.
What is Crypto Futures Trading?
Crypto futures trading is a type of trading that mimics futures trading in the regular markets. It involves using futures contracts, which are legal agreements to buy or sell an asset in the future at a predetermined price.
In crypto, it means agreeing to buy a certain cryptocurrency at a certain price at some point in the future, regardless of the price when that time comes.
The agreed time can be as short as 24 hours to as long as several years. This is often referred to as gambling because the parties involved in the transaction usually base their trades on speculation about how the asset price will perform in the future, hence the term futures trading.
Whatever happens, the trade is executed on the agreed date and time and usually favors only one person of the two agreeing to the trade. Exchanges that allow users to trade futures include Kraken, BitMEX, Bybit, and eToro, some of which are among the best crypto exchanges for US residents.
How does Crypto Futures Trading work?
Futures traders usually only speculate on how the price of a crypto-asset is likely to perform in the future. Their conclusion may be based on fundamental analysis using some calculations or technical analysis, sometimes both, on which they base their prediction that the asset will perform in a particular way on a particular day.
For example, a trader might open a futures short position on a contract to sell Bitcoin at a certain price on October 23, 2022. Someone intending to take the trade would open a long position on the contract.
Assuming the agreed price is $30,000 per bitcoin, and the current price is $23,000, the seller will sell at a profit if the price of bitcoin stays below $30,000 while the buyer loses.
On the other hand, if the price reaches $45,000 on October 23, they will make a loss and the buyer will make a profit. Futures contracts can only be canceled before the agreed date by entering the opposite trade to the one you first opened. The contract must be fulfilled when the agreed date is reached.
To increase potential gains, futures traders sometimes borrow funds from the exchanges they trade to increase the size of trades. This is called leverage and it is in multiples of the original trade size ie for a trade X, the leverage can be 10X, 20X, 50X or even 100X depending on the exchange.
It should be noted that borrowing to increase the size of a trade can backfire if the trade does not favor you. You will be liquidated and your funds will be gone for good, so it is quite risky.
How does it differ from other forms of crypto trading?
Futures trading is significantly different from other types of trading. While spot trading or peer-to-peer crypto trading involves trading one asset (or currency) for another, futures trading involves a single asset. It is also different because the trader does not trade in the crypto market directly; instead, it is between a seller and a buyer.
Another important difference between futures trading and the others is that the trade does not happen immediately or based on the current price of an asset. Instead, it is based on a speculated price in the future. In fact, the trader does not even need to own or handle the cryptocurrency he is speculating on.
Who Should Use Crypto OTC Trading?
Futures trading does not involve the actual trading of assets, but is based on speculation about the price of an asset. In order to succeed in this, a deep knowledge of the market basis and the fundamentals of the asset in question is essential.
This is sometimes combined with technical analysis to arrive at a reasonable prediction of the future performance of an asset. Although no trader always wins in all trades, you can significantly increase your chances of winning in futures trading if you have this knowledge.
Therefore, futures trading is more suitable for experienced traders who have been in the area for a while and can make reasonably accurate predictions about future price developments. As tempting as futures trading is, you should avoid it if you don’t have years of experience in the industry.
What are the risks of trading futures?
Trading crypto futures can be lucrative if done right, but it also involves significant risk. For example, using leverage is a big risk because as much as it increases your potential gain, it also magnifies your potential loss. This is even more serious in the highly volatile crypto market.
Before an exchange lends you money as leverage to trade futures, you must set aside an amount known as initial margin as insurance in case you lose in the trade. This is held in custody of the exchange and you can only access it after winning the trade and repaying the borrowed funds.
If you lose the trade, the exchange will automatically liquidate your position and close the trade, resulting in the irreversible loss of the capital you put up as initial margin. This is why leverage trading is not advisable for inexperienced traders.
Should You Trade Crypto Futures Contracts?
Like any form of crypto trading, trading crypto futures can be rewarding and many trade futures contracts full time. However, it takes time and experience to do it safely and have more wins than losses. Without this, you may have lost already, even before you start.
If you are interested in futures trading but are just getting into the crypto space, it can help to hang around and understand the market a bit more before getting involved. Study things like what affects the crypto market in general and the cryptocurrency you want to trade in particular.
This way, you can make informed trading decisions when betting your money and record more wins than losses.
This is not financial advice. If you are interested in any type of investment, you should consult a licensed financial advisor who can provide you with the best advice based on your needs and risk appetite.
