If you are considering trading cryptocurrency futures, there is a wealth of knowledge to acquire. Before diving in, it is important to have a thorough understanding of technical skills and basic trading principles. Cryptocurrency futures may seem daunting at first because complex terms such as leverage and cryptocurrency funding rates are often used. However, with the insightful and engaging guidance that awaits you in the next section, you will quickly become familiar with the exciting world of cryptocurrency futures and will be familiar with the main characteristics and aspects of cryptocurrency futures before you even know them.
What are cryptocurrency futures?
Cryptocurrency futures represent an agreement between two parties to speculate on the future value of a cryptocurrency. These products allow you to gain exposure to specific cryptocurrencies without owning them directly. These types of futures are traded both on traditional platforms such as the Chicago Mercantile Exchange (CME) and on various specialized cryptocurrency exchanges.
Cryptocurrency futures contracts consist of three essential elements:
- Expiration Date: This is the date on which the contract is expected to be concluded. At this point, one party is obligated to buy and the other to sell at the previously agreed upon price.
- Units per contract: These aspects determine the value of the contract in terms of the cryptocurrency involved and may vary between trading platforms.
- Influence: This feature allows traders to effectively increase their position size by trading with borrowed capital, amplifying their potential profits.
Settlement of futures contracts can be accomplished in two ways.
- Actual Delivery: This method involves physically purchasing the cryptocurrency and delivering it to the buyer at the time of payment.
- Cash payment: In this case, payment involves the exchange of cash between the buyer and seller at the end of the contract.
Most cryptocurrency trading platforms offer a unique form of cryptocurrency futures known as perpetual futures contracts. These contracts are distinguished by the fact that they do not expire. There are two participating parties in such a contract. One takes a buying position in anticipation of a price rise, and the other takes a selling position in anticipation of a price decline. These parties are obligated to pay fees to each other periodically.
The direction of payment depends on the contract price relative to the market price of the underlying cryptocurrency. If a contract is trading at a premium, the party with a long position pays the party with a sell position. When trading at a discount, the roles of payer and payee are reversed.
The size of the payment is proportional to the deviation between the trading price of the perpetual futures contract and the market price of the underlying asset. These payments typically occur every 8 hours, but the exact timing may vary between exchanges. The purpose of these payments is to ensure that the contract price reflects the market price of the underlying asset as closely as possible. This contrasts with traditional futures contracts, where there is only one financial settlement at an agreed upon future date.
What is Cryptocurrency Futures Trading?
The trading platform facilitates the connection of buyers and sellers for each futures contract, ensuring that the exchange itself does not act as a trading participant.
When an individual purchases a futures contract, the potential for profits increases as the price of the contract increases, which typically occurs in conjunction with an increase in the price of the underlying cryptocurrency.
Conversely, if an individual chooses to sell a futures contract, he or she may profit if the price of the contract falls to reflect a decline in the price of the underlying cryptocurrency asset.
Futures trading operates on the principle of a zero-sum game, where a gain for one participant results in an equal loss for another participant. Because futures contracts represent a direct agreement between traders, both buyer and seller must reach agreement on the terms of the contract, including expiration date, contract size, and level of leverage used.
As previously mentioned, most cryptocurrency futures contracts have a perpetual variety. This means there is no set expiration date.
How to start trading cryptocurrency futures
There are numerous futures markets today, and it is advisable to choose among the most well-known platforms such as ByBit, Binance, WhiteBIT, BitMEX and others that offer strong client security.
Alternatively, you can utilize a cryptocurrency aggregator like Bitsgap, which integrates multiple exchanges into one location and offers additional tools such as demo trading or automated bots suitable for futures trading. For example, Bitsgap offers two types of bots on the Binance Futures market: COMBO futures bot and Dollar Cost Averaging (DCA) futures bot. Different trading platforms may offer different tools, so you should explore them based on your personal trading goals and preferred exchange.
An important factor to understand before starting futures trading is the importance of risk management. Given the risks inherent in futures trading, it is important to diversify your investments and make calculated decisions based on thorough research and technical analysis rather than focusing all your resources on a single strategy.