Different cryptocurrency instruments emerged in the past years, as speculating on the price without owning assets is convenient. That’s how futures and options, derivative instruments, became more popular, and traders can take advantage of their features, including cost structures and profit potential.
Crypto futures are more common on the market as they encourage speculating on the upcoming price of an asset through a contract that has an expiration date. Traders can buy futures and sell them before they expire to receive the equivalent of the contract in the respective cryptocurrency, so you get Bitcoins for trading BTC futures.
While future BTC and ETF contracts are easier to access, these financial instruments are increasingly approaching a broader range of crypto assets. So, if you want to get exposure to futures but are not willing to own the underlying coin, here’s everything you need to know about futures.
Explaining crypto futures
Crypto futures contracts allow traders to buy or sell assets at a predetermined future update and a certain price. Users can find these contracts on exchanges that offer profitable leverage, with the option of taking long or short positions. Therefore, they can bet on whether the prices will increase or decrease.
While most contracts expire, there’s a variant that allows traders to hold their position without limits if they ensure sufficient margin. These are called perpetual swaps and are mostly leveraged by high-risk traders.
Traders are mostly interested in Bitcoin futures, which were introduced on the market by regulated exchanges, making them safer and easier to access. The CME Group (Chicago Mercantile Exchange) introduced BTC and ETF futures, and it also supports a vast array of assets, including DeFi tokens and Metaverse coins.
Contract details and how to take advantage of them
The CME CF Bitcoin Reference Rate (BRR) is the tool traders use to set the cryptocurrency’s index price. A contract’s unit is 5 Bitcoins, with the price quote represented by the USD. The usual trading hours are Sunday to Friday (5 PM to 4 PM CT), with margin requirements of 50% cash of the contract amount. The contracts are listed for six consecutive months, and the settlement method is financial.
The Ethereum Futures are somewhat similar, except that the contract unit is 50 ether, and the margin requirements include 60% cash of the contract amount. Trading them on regulated exchanges is ideal because they can set healthy boundaries for risk-taking, whereas unregulated exchanges allow users to work with higher leverages that can lead to considerable profits but put one’s assets at risk.
Why trade cryptocurrency futures?
Exposing your portfolio to the market and gaining more experience by experimenting with cryptocurrency instruments is great for beginners. In the case of futures assets, users don’t need to own them to trade them, so they benefit from safety.
Regardless, trading crypto futures offers users:
- An easier investment process, as they don’t need a crypto wallet since they don’t own the asset;
- A safer way to trade since users are not directly exposed to volatility;
- Position limits based on trading history and margin amounts;
Of course, these benefits come from trading on regulated exchanges. The CME Group is supervised by the CFTC (Community Futures Trading Commissions). Only a few other platforms allow trading and investing in BTC and ETH futures in a legal ecosystem.
Crypto futures vs options
While crypto futures are the most popular trading instruments, some users prefer options. They are similar to futures, but buyers can buy or sell the asset before the contract expires, so they can adjust the strategy if the market is risky to explore at the moment.
Traders can choose between call options, where they expect the prices to increase, or put options, when they anticipate a decline. Crypto options are more flexible and allow users to control risks better than futures, but the derivatives have a lot in common, such as:
- The option to hedge price swings in the spot market to protect the portfolio from being affected by price declines;
- The opportunity to control large positions with smaller capital by depositing a margin or gaining exposure to price growth trends;
- The chance to speculate prices without owning the underlying asset, so they can participate in market movements;
Best strategies for trading futures
Trading crypto futures can be risky, but if you choose the right strategy and are committed to navigating the market, you should approach the following:
- The long vs. short method involves checking the price direction and betting on it. For price growth, you take a long position and a short one for falling prices;
- The stop-loss orders protect you from losses since they automatically close the trade when the prices decrease too much;
- The technical analysis method supports appropriate trading since you study charts and patterns that use past price movements and trends;
When trading futures, be wary of fees and additional costs. You will have to pay trading fees and enter and exit a trade on platforms, but there are also funding fees for perpetual contracts. Finally, withdrawal fees are required when you move the assets from platforms to a wallet.
How risky is it to invest in crypto futures?
While cryptocurrency futures ensure enough liquidity for users to open or close their positions and are great instruments for diversification, they carry certain risks. For example, futures are still exposed to considerable volatility, leading to unexpected price swings.
At the same time, since futures trade on margin, the CME requirements for crypto futures are higher compared to other financial contracts. Therefore, even the maintenance margin can be pretty expensive, so they’re like a double-edged sword.
Final considerations
Many investors consider cryptocurrency futures beneficial for portfolio diversification. These assets provide more trading flexibility since you don’t have to own them to use them, so there are fewer exposures to risk. However, they’re still prone to volatility, so you must be careful when trading. Besides futures, users also look into crypto options, in which you can close the trade before the contract expires. These derivatives are trendy, but they can be risky for beginners.
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