Crypto futures have become a new normal for a lot of experienced and upcoming traders now in the crypto space. This is because it has a lot of similarities with traditional forex trading, which involves analyzing and speculating the price direction of crypto assets.
Crypto Futures are contracts involving two parties agreeing to buy or sell an underlying asset for a specific price at a specific date. Using Bitcoin Futures as a case study, bitcoin would be the underlying asset.
The futures market allows investors to protect themselves against the volatile market and guarantee that they can buy or sell a particular cryptocurrency in the near future at a specific price. If the bitcoin price goes in the other direction, the trader may have to pay more or sell it for a lower price.
Meaning of Crypto Futures
Crypto futures are contract agreements based on the value of an individual cryptocurrency at a certain time. That is why they are also called crypto futures contracts. These contracts can be defined as agreements between traders that they will buy or sell an asset at a certain price and on a specific date in the future. The holder of a traditional contract is required to buy or sell an underlying asset for the agreed price at the expiry date.
The futures market price and the traders’ positions (long or short) can determine whether they gain or lose. If you expect the price of an asset to increase, you can take a position long. A short position is when you expect a price decrease. If bitcoin’s market price at the moment is $10,000, for example, you can buy (go long), or sell (go shorter) a contract to anticipate a price rise or fall.
If you decide to go long (buy) and purchase this contract, and the price of Bitcoin increases to $20,000 before the contract expiration date, you will realize a profit worth $10,000. If the price drops to $5,000 before the expiration of the contract, you will incur a $5,000 loss. When you incorrectly predict the direction of the crypto-futures market, your position is liquidated, and you incur some losses. Still, if your prediction or speculation is correct, you make a profit from the futures market.
Now that we have a basic understanding of Crypto futures let’s examine some of the key components of crypto futures trading and understand how crypto futures trading works.
Crypto Futures Trading: How it Works
Trading in crypto futures is made easier by specialized exchanges. Traders can take long or short positions. A long position is when you buy a futures contract anticipating the cryptocurrency’s price rise. A short position is when you sell a contract anticipating a price drop.
Leverage is another key component of trading crypto futures. Leverage allows traders to control positions larger than their margin initially would allow. A 10x leverage, for example, allows a trader to control the value of a contract ten times higher than the margin. Leverage can increase profits but also increase losses.
Crypto futures trading profits and losses are determined by the differences between the opening and closing prices of the contract at settlement. Correct predictions of price movements can lead to substantial profits. A wrong prediction, however, can result in losses that exceed the margin of error.
The Key Components in a Crypto Futures Contract
As the name suggests, cryptocurrency is used as an underlying asset. This differs from traditional futures tied to commodities like oil or agricultural products. This allows traders to speculate on the price movements of digital currencies like Bitcoin, Ethereum and others.
Size and Value of Contract
The contract specifies the amount of cryptocurrency that is being traded. A Bitcoin futures contract, for example, might be 5 BTC. The current price of cryptocurrency determines the value of the contract.
Each futures contract comes with a predefined end date. The contract must be settled by this date. Traders have the option to choose contracts with different expiry dates that will accommodate both short-term as well as long-term trading strategies.
To open a futures contract, traders are required to provide a margin. This is a fractional value of the total contract. Leverage allows traders to take control of a large position using a small amount of capital.
Crypto Centralized Exchanges allow users to borrow money to expand their trading. The money the users are allowed to borrow is known as leverage. Leverage also helps increase the profit reward as the users can purchase futures contracts with more liquidity. Still, it also increases the risk level for the traders as they risk losing more money if their speculations or predictions are wrong.
Leverage rates also vary widely between platforms. Kraken, Binance allows users to boost their trades up to 50x. Bybit offers higher leverage rates of up to 100x. Kindly note that the higher the leverage used, the higher the risk level and the profit returns.
Crypto Futures: Benefits
The crypto futures contract offers traders and investors several benefits.
- Protecting Against Volatility: Due to the volatility and price fluctuations of the cryptocurrency market, futures contracts are a good way to protect against price changes. Futures contracts can be used by businesses dealing in cryptocurrencies to reduce the risk of sudden price drops. This is because they don’t own the underlying crypto assets but have contracts speculating the price movement of the assets. They will be profitable as long as their speculations are correct before the contract expires.
- Trading Opportunities: Traders can profit from rising or falling markets by taking long or short positions. The flexibility of the market allows for a variety of different trading strategies.
- The efficiency of the Market and Price Discovery: Futures markets help to improve cryptocurrency price detection. The broader crypto market benefits from the integration of information into futures pricing.
- Arbitrage Opportunities: Trading can exploit price differences between different exchanges and markets. Arbitrage possibilities arise if the futures prices differ significantly from the spot rates.
Risks and Considerations
Crypto futures are attractive, but they come with inherent risks.
- High volatility: The very same volatility that can present profit opportunities may also lead to significant losses. If not handled with care, rapid price fluctuations can lead to liquidation.
- Risk management: Effective risk-management strategies are essential for traders, such as setting stop-loss orders and managing leverage. These strategies must be implemented correctly to avoid significant losses.
- Regulation: The legal landscape of crypto futures is different in each jurisdiction. Traders must understand the legal implications of these contracts and their uncertainties.
- Risks of Counterparty: Some exchanges act as intermediaries in futures trading. The traders are exposed to counterparty risk if an exchange is insolvent or has technical problems during the trading.
Notable Crypto Futures Exchanges
Numerous exchanges offer platforms for crypto futures trading. Each exchange provides an array of features, cryptocurrencies, and fee structures. Prominent exchanges encompass the following:
- Binance: Binance is known as the largest cryptocurrency exchange by trading volume and also accounts for an estimated amount of about $58 billion of the total trading volume in Bitcoin perpetual and futures. They have an array of crypto futures contracts for traders. Making it possible to explore several options
- ByBit: Bybit is one of the fastest-growing crypto exchanges, and one of its strengths and sources of growth is its futures market. ByBit ranks among the world’s biggest cryptocurrency exchanges. It has a trading volume of over $2.75 billion and is still growing. Just like Binance, ByBit is not available to U.S. customers due to regulatory compliance reasons.
- OKX: OKX is also one of the world’s largest cryptocurrency exchanges, shown in their ability to offer about 424 trading pairs in perpetual and futures. Their trading volume is also in the billion-dollar mark, with about $4.03 billion as of July 2023.
- Phemex: Phemex is another great derivatives trading firm, as they started their derivatives trading firm in 2019. The trading volume on Phemex accounts for an estimated $2.1 billion as of July 2023.
We also have other crypto futures trading platforms like Bitget, Kraken, and Kucoin. When selecting an exchange, traders should consider liquidity, security, and trading fees.
Getting Started with Crypto Futures Trading
One major thing to take note of is you need to also make use of a reliable crypto exchange when starting out as a crypto futures trader. So as not to fall victim of the regular crypto scams from unreliable platform or exchanges. For this, the crypto exchanges mentioned above are some of the most reliable exchanges you can start trading crypto futures.
To start with crypto futures trading on any of these platforms, you can start by signing up as a new user on either BYBIT Crypto Exchanger or Binance Crypto Exchanger. If you are in the United States or Canada, then you can make use of Coinbase, although they have a limited number of pairs in which you can trade in.
To get started with your futures trading using BYBIT, you click on the button below to create an account, where you would also qualify for some bonuses and other rewards as soon as you start trading on BYBIT.
To get started with your futures trading using BINANCE, you click on the button below to create an account, where you would also gain access to many exciting features and also lots of trading pairs. You also have the option to carryout spot trading using the Binance crypto exchange platform
Verification of the Account
After inputing you profile details, you would be required to carry out your verification process. This is because as a centralized exchange, they would require your KYC before they allow you carryout Fiat payments to prevent any form of theft or fraud.
Funding Your Account
Afterward, you will need to fund your account on the crypto exchange with either stablecoin or bitcoin.
After creating an account on the exchange and funding your account with stablecoins or other crypto assets like bitcoin, the next step is to start employing trading strategies to speculate the price movement of any crypto assets in which you would like to purchase a futures contract.
You can also, purchase USDT using your local currrency on any of the above exchanges I have listed, after which you can kickstart your futures trading adventure.
Once you have been able to speculate what you think will be the future price of a crypto asset, you can then choose your leverage, which will range between 10x – 100x, depending on the crypto exchange platform you are using.
After choosing your leverage, you can then go ahead and purchase the crypto futures contract, either by speculating a higher price after a certain period or a lower price after a certain period.
You can start learning some trading strategies here on dipprofit, as we have various articles that can help you improve your trading skills. If you are interested in gaining access to our community where you are kept up to date on happenings in the crypto space and also want to gain access to some free crypto futures signal, then click the join no button at the bottom of this article.
Different laws around the world govern crypto futures. Some jurisdictions accept these instruments, while others restrict or ban them. A clearer regulatory framework can encourage a broader market and reduce uncertainty. Finding crypto exchanges to use in crypto futures trading is also largely dependent on countries and regions. In some countries, most crypto exchanges are not allowed to carry out futures trading or even operate due to regulatory issues, while in some, there are no restrictions.
In the United States, Coinbase has just been permitted to operate its futures trading platform. Still, the crypto assets that can be traded using futures contracts are only limited to Bitcoin and Ethereum. Binance, on the other hand, is no longer allowed to operate in the United States.
Crypto futures contracts are a new dimension in the cryptocurrency ecosystem. These contracts allow traders to profit from digital assets, hedge their investments, and engage in innovative interactions with them. Crypto futures are a vital tool for traders who want to navigate the volatile world of cryptocurrency trading.
Although the potential gains are undeniably appealing, it is important to approach these instruments with vigilance and caution. Making informed decisions is key to managing risks and maximizing benefits.
What are the risks associated with trading crypto futures?
If trading on exchanges, there is high volatility, insufficient risk management, regulatory uncertainty, and counterparty risk.
How are crypto futures different from other derivatives like options or swaps?
Crypto futures require that both parties fulfil the contract by expiry. Unlike spot trading, they offer leverage and profit potential even when markets decline or bearishes.
Are you interested in joining a community where you can learn all you want to know about the cryptocurrency space, defi, web3, forex trading, crypto futures & spot trading and also have access to live AMA session from time to time, then click the button below to join Dipprofit Telegram Community For Free now.