There are several ways of trading cryptocurrencies as an armature or beginner and futures trading is one of the most common today. Essentially, futures trading in crypto is an approach that may provide better opportunities to make a profit compared to other options like spot trading and leverage trading.
However, like every trading strategy, you need to learn how to leverage the technique to maximise profit. Minute acts like knowing when to open long and short positions on several digital currencies may be the thin line between profit and loss.
This article discusses futures trading in crypto, highlighting what it is, how it works and every other thing you need to know.
What is futures trading in Crypto?
Futures trading simply refers to the method of trading that involves speculating on prices of assets like cryptocurrencies without actually purchasing or owning them. Futures trading in crypto works exactly the same way as conventional futures trading in stocks. It allows traders to bet on an asset – a digital currency’s future price in this case.
How does futures trading in Crypto Work?
Similarly to regular crypto trading, traders open long and short positions for proper risk management. However, futures trading in crypto differs in the sense that the traders don’t operate with already acquired assets, but rather with their price action. This makes futures more easier and fluid and also supports margin trading with high leverage.
What is a futures contract?
A futures contract is an agreement between two trading parties to purchase or sell an asset (a digital currency in this case), at a predetermined price and on a predetermined date. Future contracts are based on underlying assets like stocks or cryptocurrencies. With a futures contract, you are essentially betting on the future price movement of the asset.
For example, if you believe that Ethereum (ETH) will rise in price by the end of the first quarter, you may proceed to open a long position on the digital asset by purchasing an Ethereum futures contract. These contracts come with an expiry date.
On the other hand, you may believe that Ethereum’s price will fall by the end of the first quarter and opt to go long instead by purchasing long-term futures contracts. In both cases, the two parties involved settle the trade at the end of the expiry date of the contract, rendering it closed.
A perpetual contract is a type of futures contract that operates exactly the same way but does not have a fixed expiration and settlement.
What are the types of cryptocurrency futures contracts?
Future trading in crypto offers several types of futures contracts to choose from depending on the trading platform. They include:
1. Standard Futures Contracts
Essentially, this refers to the conventional futures contracts from traditional markets that include settlement and expiration dates. Standard futures contracts are offered by several crypto trading platforms and are mostly settled within three months. This makes them ideal for swing trading.
2. Perpetual Contracts
The perpetual contract is another type of crypto future that does not rely on an expiration date. Essentially, it relies on funding to keep as close to the spot price as possible by traders paying each other based on their open positions at specific hours.
In perpetual contracts, when the funding rate is negative, traders who have short positions pay long, and when it is positive, the long pay short.
3. Futures with Physical Delivery
Futures with physical delivery is another type of crypto futures that comes with expiration dates. However, it is different from traditional futures contracts in the sense that the cryptocurrency is delivered during the settlement process.
What are the benefits of futures trading in crypto?
The are several advantages of futures trading which is one of the reasons they’ve become so popular today. These include:
- Futures trading is convenient and easier for beginners than actual crypto trading
- It boasts a higher profit potential when compared to other types of trading
- Futures trading in crypto also offers several trading strategy options which work well in intra-day trading
- No funding rate is required compared to perpetual futures as prices are usually in contango
How can I trade crypto futures?
Trading crypto futures follow the same rules as conventional crypto trading strategies. Essentially, it is all about effective risk management and finding the best exit and entry points.
Here are some steps that will surely be of help:
Step 1: Set aside disposable funds
The very first step for effective crypto trading and risk management is to only invest funds that you are ready to lose. Also, never borrow to trade.
Step 2: Learn adequately
Successful traders dedicate time to learn, and you should be ready to also. Basically, ensure you practice as much as possible with future trading, finding the right entry and exit point and in between, effectively monitor your positions.
Step 3: Start with a demo account
Practice trading virtual funds on a demo account. Setups like this mimic the fluctuating prices of crypto and are a good way to learn without hard pill consequences.
Step 4: Select a futures trading platform and trade
Lastly, select a reliable crypto exchange platform to trade on.
How profitable is futures trading in crypto?
With proper risk management, futures trading in crypto can be very profitable. Depending on your expertise, it may even be more profitable than crypto mining. However, like every form of trading, it remains risky, especially for inexperienced traders.
Bottom Line
Futures trading in crypto is preferred by both armature, intermediate and professional traders due to its convenience. It also provides lower risks of hacking attacks compared to the spot market.
Essentially, you have to learn the ropes, sharpening your entry and exit points intuition depending on what direction you think the market will go and purchase contracts accordingly.
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