Introduction

Futures contract trading has remained in this industry for several years. These are mostly used by industry participants who want to hedge their investments in multiple assets and commodities. It has even given a fair share of success to speculators for leveraging their position and trading these volatile derivatives. 

However, trading crypto futures is new in the market and requires needed knowledge. Although it works like traditional futures contracts, they have some differences that traders need to know before stepping inside this circle. 

This article is a detailed guide to crypto futures trading. So, move further into it to learn more about it. 

What Are Crypto Futures?

Crypto futures trading and spot trading are two different things as the latter does not require participants to hold any assets for participating. Rather, it considers buying and selling derivatives contracts that represent the value of given crypto at a specific time in the future. 

It allows investors to determine cryptocurrency’s future value. This way, traders can either go long to wage on a price advance or go short to expect a drop in the prices. It uses leverage that provides better capital efficiency and restricts traders from locking up the entire trading capital. Further, since it comes with both potential returns and risks, it is advisable to always exercise caution. 

Working Of Crypto Futures

Crypto futures contracts work on three main components. They are:

• Expiration Date- It refers to a date on which the future contract should be settled. It means that on this date one party has to sell, and the other has to sell at a pre-agreed price. However, traders can also sell on their contracts before the specified date.

• Leverage- As discussed earlier, when a trader wants to increase his potential profits, he uses leverage to borrow capital and maximize their trading size. However, remember that the leverage rates always differ between platforms. 

• Units Per Contract- It defines how much each contract is worthy of the underlying asset and varies from platform to platform.  

Why Should You Invest In Crypto Futures?

You should invest in crypto futures because of the following points:

Provides Exposure Without Owning Any Cryptocurrency

Many institutions and market pros consider cryptocurrency as their nightmare. However, this type of trading is traded on regulated exchanges and even allows institutional traders to acquire crypto exposure without getting to attend an uncomfortable meeting. 

Hedging

In crypto futures, traders can take a short position on different digital currencies. This way, hedging becomes much more effortless to accomplish. For instance, if you won a Bitcoin and want to protect yourself from a downswing, using crypto futures for taking a shorter position is an appropriate way to hedge. 

Flexibility

Institutional money managers cannot trade on unregulated exchanges frequently. They also cannot invest in digital currencies like Bitcoin and Ethereum. However, since crypto futures are contracts traded on regulated exchanges, investors and asset managers at institutions will not run afoul of their compliance departments. 

Potential Risks In Crypto Futures

The potential risks in crypto futures are as follows:

Compounding Losses

Leverage enables the profits to outsize the original investment. However, since it is a two-way process, applying too much of it can turn your trade sour and can lead to compound losses. Margin calls are frequent in the crypto community because of their volatile prices. 

Mismatched Prices On Unregulated Exchanges

Exchanges performed outside the reach of U.S. regulators have some appeal to crypto traders. However, using them creates market distortions as there are no centralized price mechanisms. 

Forced Liquidations

The futures contracts do not involve any central clearing party. It makes the process of maintaining and exchanging margins in liquidating positions. No crypto exchange will allow a position to reach bankruptcy level. When liquidation is performed for gain, profit enters the exchange’s insurance fund, thereby protecting against counterparty risk. This also creates a cascading effect when more large positions are closed out, stimulating further price declines. 

Conclusion

A lot of traders find crypto trading very exciting. Unlike spot trading, futures trading also provides strategic advantages and enables you to maximize profits. If you have appropriate knowledge and risk management strategies to avoid vast losses, it is considered highly profitable. Therefore, ensure to learn both the advantages and risks and develop a proper strategy to trade this type of investment option.