Perks and Pitfalls of Crypto Futures Trading
Despite being dismissed as a worthless concept by experts in the past, Bitcoin surged in value over 1,000% in 2017 alone and hit $1 trillion in market value for the first time. One notable price surge can be traced back to the ground-breaking news that Bitcoin futures will be traded on regulated American futures exchanges for the first time. In December 2017, futures contracts began trading on two exchange platforms and have grown into the thousands.
Bitcoin’s entry into the mainstream futures market offers the potential for increased liquidity, volatility, and leverage. These trends could pave the way for trading conditions more favorable to traditional traders seeking exposure to Bitcoin’s volatility without owning the cryptocurrency itself. However, the question remains: is it advisable to start trading Bitcoin futures now? This article will explore the perks and pitfalls of trading crypto futures.
Crypto Futures Trading
Crypto futures trading refers to the process of buying or selling standardized contracts for the future delivery of a crypto asset through a crypto futures exchange platform such as LBank.
Prior to trading, all terms of the contract, except for its price, are predetermined, ensuring a transparent and unambiguous process for both parties. The trading price is established through the trading system of a futures exchange. The regulatory framework for futures trading is established by each exchange and the Commodity Futures Trading Commission (CFTC), applies equally to trading positions executed within the trading platform, ensuring safety and fairness for all traders.
Perks of Crypto Futures Trading
Crypto Futures operate on margins, meaning that to take a position, only a fraction of the total value must be available in cash in the trading account. Such leverage is the most widely known perk of crypto futures.
- Low Fees: In the futures market, fees are relatively low, typically ranging from $0.25 to $1 per contract, which is beneficial for frequent traders who make multiple trades each day. As the futures market frequently opens and closes at different prices, making these day trades is crucial to avoid potential overnight volatility. By closing and reopening positions daily, traders can mitigate risks and potentially increase profits.
- Diversity: The crypto futures market offers an array of commodities, currencies, and indices, each with varying time expirations, providing a diverse range of options for traders to choose from. This diversity opens up numerous opportunities for traders to invest in what interests them, making it easier for them to find the right fit for their investment goals and strategies.
- Liquidity: The involvement of speculators means that futures contracts are reasonably liquid. However, how liquid they are depends on the actual contract being traded.
- Shorting: Crypto futures contracts can be sold as easily as they are bought, enabling a trader to profit from falling markets as well as rising ones. Meaning there is no ‘uptick rule,’ for example like there is with stocks.
- No Time Decay: Options suffer from time decay because the closer they come to expiry, the less time there is for the option to come into the money. Futures contracts do not suffer from this as they are not anticipating a particular strike price at expiry.
- Automated trading: Crypto futures traders can use different trading strategies and sometiems APIs to directly integrate their trading software. This means that custom-written trading software can automatically trade a strategy without any human intervention at all. Such a system can utilize buy/sell signals which are automatically routed to the exchange along with any stops and targets.
Pitfalls of Crypto Futures Trading
- Leverage: It can be a disadvantage if it encourages trading with too high a risk for a particular strategy. A carefully devised risk management plan is essential.
- Overtrading: The instant nature of crypto futures trading coupled with low transaction costs can encourage a trader to take additional trades to those determined by their trading plan.
Wrapping Up
In layman’s terms, crypto futures trading is a form of paper investment where you speculate the price of an asset. If you speculate correctly, you make a profit, or vice versa. The asset can be any cryptocurrency ranging from Bitcoin through Ethereum to Litecoin.
While crypto offers significant benefits to diversify and make profits, a carefully developed trading plan must be formulated before attempting to enter extremely volatile futures contracts.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
