Many view cryptocurrency as a very risky asset to invest in or trade. There is truth in this statement, but there’s also an opportunity. Cryptocurrency’s volatility is a benefit or a disadvantage, depending on how people use their knowledge of the market.
If the person pays attention to the news, does the research, and invests in reliable assets, they can get high returns. However, if the person doesn’t know how the market works and instead follows the direction of social media without giving it any thought, they lose money.
There are multiple strategies and solutions when it comes to trading cryptocurrency. One such option is crypto futures trading. This article explains it and gives a few ideas on how to get started.
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Understanding Futures Contracts
Futures contracts are financial deals or agreements between two parties (buyer and seller) to buy or sell an underlying asset. The list of assets ranges from fiat currencies to commodities or cryptocurrencies. The agreement means that the two parties agree to fulfill the contract at a future date and price.
These contracts are exchanged on trading or exchange platforms. The contract terms are standardized and include such financial and other details as the quantity and quality of the underlying asset, the delivery date, the price, etc.
Typically, the two parties involved in future contracts are also called long and short positions (buyer and seller, respectively). The buyer commits to acquiring the underlying asset at the pre-determined price on the contract’s expiration date, while the seller agrees to deliver the asset on that date. Futures contracts are settled daily, with gains and losses paid or debited to the accounts of the parties.
Investors and traders use futures contracts to hedge against prospective losses or to speculate on price changes of the chosen asset. A farmer can use a futures contract to lock in a price for their produce, protecting themselves against price fluctuation. A speculator could enter into a futures contract to profit from price swings without owning the underlying asset.
How Crypto Futures Work
Futures trading crypto work similarly to regular futures contracts. These agreements allow traders to buy or sell an underlying cryptocurrency at a set price and date in the future. However, there are some significant variations between how crypto futures work and standard futures.
One significant difference is that virtual currency futures are often settled in cryptocurrency rather than cash. At the end of the contract, the parties involved will exchange the pre-determined amount of cryptocurrency instead of settling in fiat currency.
Another distinction is that crypto futures are traded on cryptocurrency exchanges and trading platforms as opposed to standard exchanges. Crypto futures also allow traders to use leverage, which allows them to control a larger position in the market with less capital.
The knowledge of the market combined with leverage allows traders to boost their potential earnings if their predictions are correct. On the other hand, traders also expose themselves to increased risks because losses can be magnified through leverage.
Crypto futures contracts are classified into two types:
- Perpetual. These agreements don’t have an expiration date, and their value is determined by the difference between the current market price and the contract price. So, they are similar to spot trading.
- Fixed-date. These contracts have a pre-determined expiration date and settlement price.
Trading crypto futures enable traders to hedge against volatility and speculate on price movements without owning the underlying crypto asset. Still, they are a complicated financial tool that necessitates a careful assessment of risks and potential benefits.
How To Trade Crypto Futures?
Overall, the process of trading crypto futures is the same on all exchanges and trading platforms. See more process depending on the chosen strategy, but the general instructions are as follows:
- The first step is to find an exchange or trading platform that allows you to trade crypto futures. WhiteBIT, Binance, BitMEX, Huobi, and OKEx are a few popular exchanges.
- After you’ve decided on an exchange, you’ll need to register an account and undergo the verification process. The process requires filling out some personal information and proving your identification data (sending an ID scan).
- Once your account is validated, make a deposit to have funds to trade. Many exchanges allow both cryptocurrency and fiat currencies as deposits.
- Choose the cryptocurrency futures contract that you want to trade. Select the underlying asset, contract type (perpetual or fixed-date), and expiration date.
- Choose your position in the market. You can choose either long (buying) or short (selling). Leverage can also be used to raise the size of your investment and possible earnings, but it also increases your risk, so ensure you feel comfortable with your skills and experience.
- Monitor and manage your position closely to ensure that you are not exposed to excessive risk. You may also need to manage your position by modifying your stop-loss orders or adding or removing leverage.
- Get ready to exit your trade once you’re satisfied with the results. You can do so by selling (if you are long) or purchasing (if you are short). The profit or loss will then be calculated based on the difference between the contract price and the market price.
Ensure you incorporate a risk management strategy since crypto is notoriously volatile.
Strategies To Trade Futures In Cryptocurrency
If you’re not sure where to start with your strategy, you can use a few convenient ideas. Here are some futures trading strategies in crypto:
- Arbitrage strategy. It involves taking advantage of price differences on various cryptocurrency exchanges or different futures contracts.
- Breakout strategy. It means identifying levels of support and resistance on a price chart and taking a trade when the price breaks above or below these levels. The strategy requires the usage of indicators and charts, so you should learn about technical analysis.
- Trend-following strategy. According to this strategy, traders use indicators like moving averages, trendlines, and chart patterns to determine the trend’s direction. Based on the direction of the trend, they can then enter a long or short position.
- Mean reversion strategy. It entails spotting when the cryptocurrency’s price deviates from its average price and placing a position to get income from a probable price reversal.
Before choosing any strategy, ensure to research it and identify your goals. You should also use risk management tools to minimize losses.