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There are several ways to gain exposure to cryptocurrencies, but one of the most well-liked and practical methods is crypto futures trading. You can learn everything you need to know about futures trading here. It can offer superior prospects in that situation compared to spot trading and options trading. It can initiate long and short positions on various digital currencies. Here is everything you require to know.
Futures trading is a method to speculate on an asset’s price, including the cost of cryptocurrencies, without owning it. The future price of a digital currency can be predicted by traders using cryptocurrency futures, just like with commodities or stock futures. Undoubtedly, Bitcoin futures are the most widely traded form of cryptocurrency futures contracts.
How Does Crypto Futures Work?
You couldn’t identify the difference between conventional trading and crypto futures trading if you observed the process on a platform for crypto exchange like Bybit. This is primarily due to traders opening long and short positions and using appropriate risk management strategies in both scenarios.
Futures contracts, nevertheless, operate solely on the price action of the underlying assets, which makes them fundamentally different from spot trading. Futures are far more elegant and manageable without physical support. Additionally, they create high leverage margin trading possible.
What is a Crypto Futures Contract?
The broad class of trading products known as derivatives, including contracts for difference (C.F.D.s), options, and swaps, includes futures contracts.
Futures contracts initially made sense for various commodities, such as food, energy, and metals. They soon, however, moved past these practical considerations to seize control of all financial markets, including cryptocurrency. Today’s global price quotes you see on financial platforms involve futures, frequently with monthly expiration dates.
A futures contract is an agreement between two parties to purchase or sell an asset, like digital money, at a fixed price and on a given date. The contract follows an underlying asset, such as a stock, commodity, or digital currency. Essentially, it is a wager on how prices will change in the future.
For example, you might be intrigued in starting a long position on the cryptocurrency by purchasing a Bitcoin futures contract with a monthly expiration date if you believe that the Bitcoin (BTC) price will rise by the month’s end. Otherwise, if you think the price of Bitcoin will increase, you will go long. The two parties to the deal settle on the contract’s expiration date, which is then considered closed.
Perpetual contracts are distinct from the rest since they do not expire. They act precisely like conventional futures but without expiration or settlement.
A perpetual contract’s price closely tracks and trades around the spot price of a cryptocurrency. The funding rate, which determines how often longs and shorts make payments to one another according to the state of the market, is the primary mechanism that makes perpetual contracts viable.
Types of Crypto Futures Contracts
A range of futures contract types is available to cryptocurrency traders. Be careful to choose the proper futures exchange because not all platforms provide the options above.
Standard Futures Contracts
Regular crypto futures include expiry, settlement, and all the other features of a typical futures contract from traditional markets. The first futures trading platforms to introduce Bitcoin futures contracts were the Chicago-based C.M.E. Group and C.B.O.E. in December 2017. This was just one of many factors that drove the price of BTC to a record high, which remained until it surpassed $20,000 in 2020.
As seen on its Bitcoin Futures Calendar, C.M.E. now offers several Bitcoin futures with various expiration dates. At expiration, all contracts are settled in U.S.U.S. dollars. While C.B.O.E. decided to stop offering Bitcoin futures contracts abroad, it would undoubtedly resume them shortly, given the burgeoning interest in cryptocurrencies.
On the other hand, several cryptocurrency exchanges do provide conventional futures contracts. Most offer quarterly Bitcoin futures, frequently traded in U.S.U.S. dollars, just like Deribit, Bybit, F.T.X., and Binance. They are excellent for swing trading and are often settled every three months.
Futures with Physical Delivery
Futures with physical delivery are another bitcoin future with expiration dates. Bakkt, a company funded by Intercontinental Exchange (I.C.E.), the New York Stock Exchange parent company, was the first to introduce them. The fact that cryptocurrency is distributed during the settlement process is the only distinction between these futures and the conventional ones mentioned above.
Presently, Bakkt exclusively provides Bitcoin futures with physical delivery, which means that it distributes Bitcoin to customers who purchased Bitcoin futures on the expiration date. This strategy seeks to increase Bitcoin circulation by acting as a futures contract with a cash settlement.
Another well-liked variety of cryptocurrency futures is perpetual contracts. Perpetual contracts immediately gained popularity on BitMEX because they are independent of the expiration date. Major cryptocurrency exchanges like Bybit, F.T.X., and Binance soon followed suit.
Funding is the main factor that keeps perpetual contracts as close to the spot price as possible. At specific times, traders compensate one another based on their open positions. Who pays what and who gets paid depends on the difference between the everlasting contract price and the spot price. As a result, traders with long positions pay futures contracts when the funding rate is positive and vice versa when it is negative.
The financing payments are made every 8 hours, and the perpetual contracts are exchanged in U.S.D.T. and other stablecoins, which is essential information for Bybit traders.
Although the cryptocurrency perpetual futures market has expanded quickly, there is still an opportunity for growth in terms of trading volume compared to traditional futures exchanges.
Even while the trading activity for perpetual futures has plummeted, they have not been as significantly impacted by the sharp decline in crypto prices in 2022. Coinglass shows that the typical futures volume is between $50 billion and $200 billion.
The top and decentralised exchanges will continue competing fiercely for market share in the lucrative field of cryptocurrency futures.
Futures vs Options Differences
Bitcoin futures and Bitcoin options are also available for trading on Bybit.
Futures contracts can be helpful for speculative traders. Still, they are handy for people and businesses dealing with the underlying assets since they let them insure against unforeseen market volatility, movements, and operational and business risks.
Bitcoin miners provide the most typical illustration. They make money from the Bitcoin they generate and sell, but even though their expenses are typically fixed and paid in fiat, the value of bitcoin might vary considerably.
If Bitcoin’s price falls sharply in the future, miners may find it challenging to cover their fixed expenses, endangering their ability to continue operating.
Miners can use the futures market to locate prospective purchasers for their Bitcoin at levels that will allow them to continue making a profit and mitigate this risk.
Contrarily, option contracts have fewer downside risks, so they are more suited for speculative traders. The trading of Bitcoin options and futures is also possible on Bybit.
Both institutional and individual traders prefer crypto futures due to their ease and reduced danger of cyber attacks on the spot market.
Despite being a different derivative, cryptocurrency options are still less common than futures. In an option contract, the buyer has the right, but not the obligation, to purchase the underlying asset in a call option or sell it in the case of a put option at a fixed price.
Both derivatives give traders the ability to insure against volatility risk and experiment with novel strategies that may prove more lucrative than standard trading.
Who should Trade Futures?
Futures trading is a good place for anyone interested in bitcoin trading to start. However, this financial instrument is ideal for individuals who wish to learn more about cryptocurrencies without storing them in digital wallets or giving their security any thought.
Additionally, crypto futures allow for various operations and techniques that cannot be successfully used in spot markets. And that includes gouging and short-selling.
How Lucrative is Trading in Crypto Futures?
Trading cryptocurrency futures can be pretty profitable, provided good risk management is used. Regular traders may find this pastime more lucrative than Bitcoin mining, necessitating pricey equipment. This is the best-case situation, though. Significant hazards associated with trading, in general, shouldn’t be disregarded.
What are The Benefits of Futures Trading?
For a good reason, futures contracts for cryptocurrency have become very popular. Take into account these advantages of cryptocurrency futures:
- Even for beginners, trading futures is more straightforward than trading actual cryptocurrencies, which calls for access to a liquid market and possession of a secure digital wallet. This is the main factor driving the two to three times higher trading volume in cryptocurrency futures than in spot trading.
- Gains are often more significant when using leverage to trade crypto futures. By setting the force on Bybit to 100x, you may open a position worth $1,000 with just $10 in initial money. You should be aware, nevertheless, that using leverage also entails more significant loss risks.
- Trading crypto futures is a far better way to apply trading methods than actual crypto, mainly intraday trading. Additionally, you can go short without any obstacles with crypto futures. There are more opportunities for you to use various trading tactics to increase profits.
- Futures do not have a financing rate, and prices are frequently in contango, indicating future costs are more significant than the current spot prices. This is a crucial distinction between futures and perpetual futures. By combining a long position in the spot price and a short one in futures, cash and carry trading, a market-neutral technique, can take advantage of this opportunity. Regardless of the state or volatility of the market, the futures price coheres with the spot market rate on the day of settlement, producing relatively risk-free gains.
What are the Risks of Futures Trading?
Generally speaking, several industry professionals think that the underlying crypto economy is still too young to support a futures market. These detractors claim that Bitcoin’s instability may spread to other areas of the futures market. However, no serious incidents have been recorded by crypto futures platforms yet because, unlike ordinary crypto exchanges that keep clients’ cryptocurrency holdings, most are not vulnerable to cyber assaults. For instance, futures trading on Bybit is simple and practical.
Although higher-than-recommended leverage is alluring to newcomers, there are hazards associated with market volatility, a 24/7 market, and inadequate futures trading tactics borrowed from traditional markets without any changes.