Cryptocurrency futures work similarly to traditional futures contracts, in which the movements of their prices are determined by a different, underlying asset, but there are several differences between these contracts which traders need to understand before they get in the ring.
Cryptocurrency futures are bets made between investors on the future o a cryptocurrency’s price. In a future, one investor expects the price of a cryptocurrency to change, and they purchase the right to either sell or buy the currency at the new price from the other investor.
Futures contracts are much different than spot trades as they do not work on an underlying asset, only on its price action.
These traders are far more comfortable with Trading derivative products as the rules of trading futures are very similar on traditional financial markets to those of Digital Token Exchanges. So far, most institutional investors can only trade Bitcoin Derivatives, not Cash contracts, concentrating Wall Streets’ exposure to the Futures Markets and Over-the-Counter (OTC) contracts, like Non-Deliverable Forwards.
Futures Are an Attractive Alternative to Direct Purchases
While some traders prefer to hold bitcoins directly, others are turning to futures markets. For a new trader of crypto, you will need to decide whether you want to hold the virtual currency directly, or whether you want to trade in futures, which offers higher rewards but also higher risks.
Trading futures is easier even for beginners than actually trading cryptocurrency, which requires accessing liquid markets and having a safe digital wallet. If you are looking to make trades in the crypto markets, and do not want to use cryptocurrency as your payment method, then crypto futures contracts could be a great option.
Speculators may use cryptocurrency futures to speculate about a digital asset’s future direction, but they may also be used to hedge against the risk of a cryptocurrency price. In addition to being used to speculate on a cryptocurrency’s future price, cryptocurrency futures contracts can also be used as a means to hedge price risks. Since cryptocurrency is a digital asset, it is settled monetarily, and by adding a perpetual futures contract, there is no expiration date required to even make a settlement.
Perpetual Contracts and Futures
A perpetual contract, or perpetual exchange, is just like any other futures contract, except perpetual contracts have no defined end or settle date, which allows them to be held or traded indefinitely. Bitcoins perpetual contracts are derivatives, which, unlike futures or options, have no expiration date or settlement date.
Similar to futures trading in traditional assets, cryptocurrency futures are a way of betting on the direction of prices in specific cryptocurrencies without owning any underlying tokens. Trading in crypto futures is an excellent method of hedging against traditional assets or the potential for Bitcoins’ dramatic fall.
Trading bitcoin futures does not expose you to extreme losses in the price of BTC on the spot market, given the fact that futures contracts come with predetermined prices at expiry. For instance, if you believe Bitcoin (BTC) is going to rise in price later this month, then you will be interested in opening a long Bitcoin position by buying a Bitcoin futures contract with a monthly expiry date.
For instance, consider the idea of selling a short futures contract –, entering into a contract in which you sell an underlying asset, then you can buy it back, ideally, at a lower price at some point in the future, making money off of the difference between what it is worth and what it is worth. As you can see, with a transaction like this, or a contract, the trader or investor can profit even as prices fall, never having to own the underlying asset.
In either case, if the buyer purchases a futures contract for a bitcoin ($40,000) for one bitcoin ($40,000) with the value of the bitcoin ($40) rising to $60,000 when the contract is closed, then the buyer would realize $20,000 in profits. In the case of Interactive Brokers, one could effectively purchase futures at the Chicago Mercantile Exchange, where the total cost of an all-in contract is $15.01, for a total of five bitcoins in each contract. Traders can buy and sell Bitcoin futures, too, as well as benefit from significant discounts for volume trading.
Traditional Brokerages and Cryptocurrency Futures
Traditional brokerages have the benefit of offering a wider range of investment securities, although typically, bitcoin cannot be traded directly, only in futures. Cryptocurrency exchanges, meanwhile, are limited to digital currencies, although you can hold one directly, and can usually buy multiples, instead of just buying one bitcoin or one bitcoin future, like with a traditional brokerage. Not only are cryptos as volatile as they are, but crypto futures on unregulated exchanges such as Binance are also frequently traded at a leverage of up to 100-to-1.
Futures may be even a more appealing way to play their volatility, as it allows traders to leverage their gains (but also their losses) to increase them. Futures contracts were initially designed to let market participants cover their risk exposure in specific assets, such as gold or oil, but have also been a windfall for speculators, who can manage big positions with just a small portion of their capital thanks to leverage. Futures enable traders to participate in a carry strategy, getting access to financing.
For instance, futures could help to secure investments without harming the cryptocurrency’s current assets. Derivatives like futures and options are appealing because derivatives allow investors to wager on the movements in prices over a set period, only having to stake a fraction of their trading value upfront. Essentially, cryptocurrency futures have an expiration date, sell price (market-determined value), and a futures price.
Futures are financial contracts that commit the investor to buy or sell the underlying asset at the preset price and set expiration date; a purchaser of a futures contract is required to buy or sell the underlying asset at the preset price, no matter what this market price is on the expiration date.
For casual traders, crypto futures trading may prove to be more profitable than bitcoin mining, considering the latter requires costly hardware. While many are just speculating on cryptocurrency — buying or selling an asset outright — some are interested in taking advantage of the market’s movements even more.