Before explaining extensively the reasons why you should consider trading futures, it’s important to understand how it they differ from trading spots. When you buy a crypto asset, you own a fraction of the cryptocurrency. That is, when the bitcoin rises in value, your fraction also increases. That’s why we say you buy shares.
Trading futures, on the other hand, requires a contract to buy or sell the cryptocurrency in the future. That’s why they are called futures. You can buy or sell these futures contracts as easily as trading crypto spot markets. However, the general public’s perception of futures trading is that it can involve a high risk in investment and also much speculation. But while futures do involve a high risk of loss, the irony is that they are also instrumental in reducing risk.
Future trading can be highly profitable with proper planning, research, analysis, and risk management. This guide will highlight top reasons why you should consider trading crypto futures contracts.
Understanding Crypto Futures Contracts
Typically, a futures contract is a financial contract to buy or sell an underlying instrument at a fixed date in the future at a specific price. Trading Futures involves buying and selling futures contracts. Crypto futures contracts can be issued on a variety of crypto asset instruments such as bitcoin, ethereum, solana, etc.
Futures trading is based on contracts. It’s as simple as buyers purchasing a contract based on what they believe will happen in the future, and regardless of what actually happens, both sides are bound by the contract. Of course, nothing is completely risk-free; certain boxes must be ticked to ensure your trade positions become profitable.
To understand how a basic crypto futures contract works, say that a crypto trader believes that the price of Ethereum will increase over the next month, and they purchased an Ethereum futures contract for $2,000, with a delivery date one month from now. If the price of Ethereum increases to $3,000 by that delivery date, the trader could trade their contract for a profit of $1,000.
Conversely, if the price of Ethereum decreases to $1,000 by the same delivery date, the trader would still have to buy the Ethereum at the agreed-upon price of $2,000, resulting in a loss of $1,000.
So basically, crypto futures allow traders to speculate on the future price movements of cryptocurrencies and potentially make a profit, but they also face the risk of losses if their predictions turn out to be wrong.
Top Reasons to Consider Trading Crypto Futures
One of the most notable reasons to consider trading crypto futures is its increased profit potential. Typically, a trader with a small account balance of $50 could use 10x leverage and borrow $450 to enter a long or short position worth $500. If the trade turns out well, a 10% price change could help double the initial balance of $50 on the account within a very short period.
Crypto futures do not only serve as an alternative way of investing in crypto assets; they simplify the process of trading items. For example, while trading bitcoin futures, you don’t need to create a Bitcoin wallet or lock up your funds for storage and security while trading because there is no actual Bitcoin exchange.
3. More secure Than Owning Crypto
Bitcoin futures contracts are relatively more secure as they mitigate risk exposure with position and price limits. In other words, futures trading eliminates the risk of ownership of a volatile asset.
4. Highly Liquid
Trading crypto futures are considered to be very liquid. There are large amounts of contracts traded in the market daily. You can place an orders very easily and they can be bought or sold very quickly. There will always be a significant available number of buyers and sellers for futures contracts.
5. Making Profits When Market Moves Both Ways
When you’re trading crypto futures, you will have the option to go long or short, meaning you can profit whether the market is going on an upward trend or a downward trend. You may enter a long position in a bullish market, or go short in a bearish market.
6. Position Limits
This varies between different exchanges. For example, the CME group enables a maximum of 2,000 front-month futures contracts and 5,000 contracts across different maturities. LBank, a top cryptocurrency exchange with a large trading volume, has a position limit adjustment feature that allows traders to manually reconfigure limits based on past trading history and margin amounts.
7. Paper Investment
Futures trading is basically a paper investment. Even though futures trading involves commodities, you will not need to worry about the actual crypto asset itself or changing hands on the asset. This makes it simple and convenient without the concern about actual storage.
Crypto futures trading allows you to buy and sell crypto assets without actually owning them. While they offer simple ways to make profits from the crypto market, they do carry some risks as well. These are some of the elements to consider before considering trading futures.
It is important to learn about volume, standards, and trends of the market before delving fully into this method of trading. Being a better futures trader, or any trader for that matter, involves learning and growing as a trader, and education in this market takes place on a daily basis.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.