Futures in cryptocurrency – what is it

Futures in cryptocurrency – what is it

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Cryptocurrency futures appeared relatively recently, but have already become popular among traders. They open wide opportunities for investment and earnings. You need to understand their features, advantages and disadvantages, which we will talk about before you start trading cryptocurrency futures.

What are futures on a cryptocurrency exchange?

Futures have existed in the stock market for many decades, while they appeared in the cryptocurrency market only a few years ago. Today it is an effective tool for controlling risks and making a profit. In simple words, cryptocurrency futures are a contract for the purchase of cryptocurrencies not now, but in the future at the price specified in the contract.

Futures are often compared to stock market indices. The investor assumes the risks of the asset value using this tool. The trader does not trade crypto in the usual sense in accordance with the contract.

In simple words, futures in cryptocurrency contract is an agreement to buy or sell a coin at a price set at the time of the agreement, on a predetermined date.

For example, a trader expects that in a month the Bitcoin rate will rise, he buys a BTC futures contract with a one-month expiration date, opening a long position. The parties to the contract settle accounts, and the profit is received by the one whose forecast came true at the end of the period specified in the contact.

A feature of futures trading is the ability to protect your asset from the extremely high volatility of the coin. Futures are used to achieve two goals:

  • receipt of speculative profit on the difference in rates;

  • risk hedging.

Investors implement several risk hedging scenarios with the help of futures. If a trader believes that the price of an asset will fall soon, he can open a futures contract to sell crypto at the current price. Thus, he will not lose funds if the coin rate really falls. Or he can create two opposite positions to reduce the size of the loss if the forecast does not come true.

Leverage is one of the benefits of futures trading

Futures’ trading is attractive to traders due to the possibility of using leverage, which cannot be done in the spot market. You need to spend several tens of thousands of dollars (depending on the current exchange rate) to buy a whole BTC on the spot market.

A trader can create a contract to buy an entire BTC while paying only a fraction of its value by choosing the futures market. The larger the leverage, the smaller the amount of own funds that the trader will have to spend. Leverage – is the ratio of the deposit to the lot. For example, the deposit is $1,000 and the lot is $10,000. The leverage in this case will be 1 to 10. This is a brokerage service, a loan provided to the trader to secure the selected transaction.

Pros and cons of cryptocurrency futures

How much they earn on cryptocurrency futures is impossible to say for sure, it all depends on the amount of the transaction. But we can definitely say that trading in the futures market is more profitable than in the spot market.

Main advantages:

  • Provides an opportunity to play against the market trend. You can make a profit both with growth and with a fall in the asset price, the main thing is to make the most accurate forecast.

  • Ability to trade with leverage, increasing the size of the expected profit.

  • Risk reduction. Futures contracts allow you to reduce the risks for your investment portfolio.

Like most trading methods in the crypto market, futures contacts have disadvantages:

  • Volatility. Not everyone is able to correctly determine the dynamics of the exchange rate, and due to a sharp change in price, you can always lose part of the funds.

  • Riskiness when using leverage. Leverage is both an advantage and a disadvantage at the same time. It increases the amount of possible profit, but also increases the amount of losses if the trader made a mistake in the forecast.

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