Cryptocurrencies have taken the financial world by storm, disrupting the traditional investment landscape and offering new opportunities. And one of the most exciting and lucrative ways to get in on the action is through crypto futures trading!
As cryptocurrencies continue to gain more mainstream acceptance, futures trading is fast becoming a must-try option for any ambitious trader looking to grow their portfolio. In this article, we’ll take you on a journey into the crypto futures trading world, exploring its benefits, potential risks, and how to get started!
What is Crypto Futures Trading?
Before jumping right into crypto futures contracts, let’s first understand what futures contracts are in the traditional financial markets. Futures contracts are a kind of derivative trading product that involves a regulated agreement between two parties to purchase or sell an underlying asset at a predetermined price on a specific date.
Investors use futures to hedge against unpredictable market fluctuations and ensure that they can buy or sell a particular asset at a fixed price in the future. However, if the price moves in a direction opposite to what a trader desires, they may end up paying more than the market price or selling at a loss.
Crypto futures contracts allow investors to gain indirect exposure to the token and potentially profit from its price fluctuations without actually buying or selling the cryptocurrency.
Let’s use Bitcoin (BTC) as an example of an underlying asset when trading crypto futures.
Components of Crypto Futures Contracts
Crypto futures contracts consist of three primary components:
- Expiration date: This is the date when the futures contract must be settled, with one party buying and the other selling at the pre-agreed price. Traders can sell their contracts to other investors before the settlement date.
- Units per contract: This defines the worth of each contract in terms of the underlying asset, and it varies between platforms. For example, a BTSE BTC futures contract is worth 0.001 Bitcoin (in USD), while this may differ on other platforms.
- Leverage: Exchanges allow users to borrow capital to amplify their trading size and potential gains. Leverage ratios vary across platforms, with BTSE offering up to 100x leverage, while other platforms offer various rates.
Additionally, futures contracts can be settled in two ways:
- Physical delivery: The buyer purchases and receives the underlying cryptocurrency upon settlement.
- Cash settlement: Upon settlement, cash (typically in USD) is transferred between the buyer and seller.
Certain platforms allow for futures contracts to be settled in various forms. BTSE‘s multi-asset settlement function offers traders the freedom to settle futures contracts in their preferred cryptocurrency, fiat currency, or stablecoin, providing more flexibility and convenience.
What sets Perpetual Futures apart from Time-based Futures?
If you’ve been in the crypto world long enough, you’ve likely encountered the term “perpetual futures contract”.
Perpetual futures, or “perps”, function similarly to futures contracts by allowing investors to buy or sell an underlying asset at a future date. However, perps differ from time-based futures in one crucial aspect: they have no expiration date.
This means a trader can keep their open contract to buy or sell the asset as long as they like, provided they keep up with margin payments until they’re ready to settle or transfer it to another trader.
Since perpetual futures contracts have no expiration, they require a unique mechanism to ensure that the contract price tracks the spot price (current market price) as closely as possible. This mechanism is called a “funding rate“. Long traders (buyers) and short traders (sellers) pay each other a periodic fee, depending on whether the contract price is above or below the market price.
If the market price falls lower than the perp futures price, long traders must pay a fee to short traders to discourage more long positions. Conversely, if the market price is higher than the perp futures price, short traders must pay a fee to long traders.
Funding rates can provide valuable insights into market sentiment around a given asset.
Risks of Crypto Futures Trading
Crypto futures trading can offer various benefits, including indirect exposure, trading with leverage to boost potential gains, and the ability to hedge against volatile markets. However, it is crucial to be aware of the potential risks associated with it, particularly margin calls and liquidation, to make informed investment decisions.
Trading with leverage involves borrowing funds from a third party, usually the exchange you’re trading with, to increase your trade size. To open a leveraged trade, a trader must set aside an “initial margin” as insurance in case the trade goes against them. The initial margin is kept in a “margin account,” which is where the minimum amount of collateral required to open a futures trade is kept.
When the capital in a trader’s margin account is getting low, the exchange will notify the user with a “margin call“. The “maintenance margin” is the amount of funds a user must have ready to deposit into their margin account should their initial margin deplete.
In the event that the market goes against a trader and their respective margin account is depleted, it may trigger a “liquidation“, whereby their position will be automatically closed by the exchange, and their initial margin consumed. It’s worth noting that while trading with leverage can turbocharge potential gains, it can also amplify losses. It is essential for a user to possess a clear understanding of the potential risks of futures trading and to effectively manage them to ensure a successful outcome.
Getting Started with Crypto Futures Trading
To start trading crypto futures, you can open an account with a crypto exchange that offers the service. Once you have opened an account and funded it with cryptocurrency or fiat currency, you can start trading futures contracts. If you’re new to crypto futures trading, it is advised to start with a small position size and gradually increase as you become more comfortable with the market.
Sign up for a BTSE account here.
Trade BTSE Futures here.
Learn more about futures trading on BTSE:
- How to Trade Futures Contracts on BTSE
- BTSE Futures: User Interface Guide
- How to Fund Your BTSE Futures Wallet
- BTSE Futures: What Is Leverage and How to Adjust It
- BTSE Futures: What Is Funding Rate?
- BTSE Futures: What Is Liquidation?
Our aim is to create a platform that offers users the most enjoyable trading experience. If you have any feedback, please reach out to us at firstname.lastname@example.org or on Twitter @BTSE_Official.
Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.