Futures in crypto – a trading instrument rapidly gaining popularity

Buying cryptocurrencies entails many difficulties. It is necessary to pay commissions to the networks and store them in special wallets. This is why cryptocurrency futures contracts have been introduced, allowing people to profit from the movement of cryptocurrencies without having to buy the coins themselves. 

Cryptocurrency futures trading is a new type of trading. Its point is that traders bet on the future price of a cryptocurrency. Futures trading has a number of features, advantages, but also disadvantages that you should be aware of before you enter into the trade. In this article, we will look at all the features.

What is futures trading?

On the outside, futures trading seems no different from spot cryptocurrency trading on the exchange itself: traders make predictions about price movements, open and close orders, and take profits or losses. Nevertheless, technically, futures trading is fundamentally different from cryptocurrency trading because it isn’t based on a real asset, but rather only on an estimate of the asset’s future price. 

The futures price is tied to the price of the underlying asset. When a new contract is initiated, the difference in price can be significant, but as the expiration date approaches, the correlation becomes stronger. Futures are executed in direct correlation to the price of the underlying asset on the expiration date. When a user expects the cryptocurrency price to rise at the end of the month, the user opens a long position on the cryptocurrency by buying a futures contract for that month. If the price is expected to fall, though, a short position is opened. When the contract expires, both parties involved in the transaction come to an agreement and the contract is closed.

Types of futures contracts

Here are several different kinds of futures contracts available for traders to consider on several cryptocurrency exchanges.

Standard contracts

Standard futures contracts are similar to futures contracts for any other commodity. They have the traditional features of futures contracts: expiration and settlement at the end. To trade, you must first become a client of a broker who gives you access to this market. But you can also trade on your own at cryptocurrency exchanges where it is possible. The WhiteBIT exchange https://whitebit.com/futures offers stable futures trading with high security and low commissions.

Perpetual contracts

These are the most popular contracts in the cryptocurrency environment and the most easily available. They can be concluded not only on the “king of cryptocurrency” Bitcoin, but also on many altcoins, even on little-known and new coins. Perpetual contracts are only available on cryptocurrency exchanges.

Handshake financial deal concept

The distinguishing feature of perpetual contracts is that they do not depend on an expiration date. The price of the perpetual contract trades at a level close to the spot price of the cryptocurrency, and the object of exchange is the interest rate. There is no delivery of cryptocurrency at the end of the contract term. Settlements are made between the traders themselves, depending on the results of opening and closing their positions.

Futures with physical delivery

Futures contracts with physical delivery are characterized by the fact that cryptocurrency is delivered during the settlement process in which the cryptocurrency is transferred upon expiration to those who purchased futures contracts for it. Such contracts exist only for bitcoin.

Starting to trade futures

Cryptocurrency trading is not easy for anyone, especially for beginners. It takes a lot of time to understand the patterns of market changes, the impact of external factors on it, and people’s motivations to participate in it. It is not surprising that with so much information to study, many beginning traders make unsuccessful attempts to understand the situation. For this reason, a strategic approach to any trade is essential.

Writing a trading plan

A trading plan is a tool that allows you to stay on track. It is designed to exclude negative consequences, ensure compliance with the trading strategy and keep the risk under constant control. A well-developed trading strategy has many advantages, from reducing the number of unsuccessful trades to reducing stress during trading operations. 

Without a proper trading plan to manage emotions, money, and risk, the risk taken by inexperienced traders can be far greater than what a more strategic trader with a more organized trading planning process would be exposed to.

Choose a trading methodology

Choosing the right trading methodology doesn’t just mean watching a couple of videos or reading an article or two on the Internet. It must be personalized, meaning it must fit your personality traits, risk appetite, financial situation, lifestyle and ultimate goals. You must, first of all, analyze yourself, understand what risks you are ready for. Set long term goals. Define trading parameters, analyze the effectiveness of each parameter and your own attitude towards it. If you have any problems in the process, do not be afraid to change something.

Risk management strategy

In today’s world, many people strive to get their share of the world’s financial markets. However, for the most part, most of them fail to make long-term profits, or at least the profits they originally hoped for. You can often find traders who have lost most or all of their invested capital. Developing a proper risk management strategy and disciplined compliance is certainly part of the solution to many of the problems many traders and investors face. 

Of course, risk management, like any other field, has its disadvantages, such as the fact that it requires certain knowledge and skills, which take time to master. In addition, various risk management strategies can reduce the potential profit from a transaction.

Choosing where to trade

Futures contracts are traded on many exchanges, but platforms differ in the number of contracts available and their liquidity.

Cryptocurrency exchanges have no state-level regulation of futures trading. They have much lower entry thresholds, both in terms of identification and the amount of funds invested. 

Any good cryptocurrency exchange must meet certain criteria for futures trading, namely a good reputation, acceptable operating hours and, of course, positive user reviews. In addition, the exchange should have a good selection of currency pairs. Another significant factor is that the exchange offers several options for deposit and withdrawal funds: the more options, the better. And, of course, the policy of transparency is very attractive, because it is really important that the developers were in touch with their users, informing them about the news of the project, answering their questions, etc. 

Based on these criteria, WhiteBIT exchange crypto futures trading offers an opportunity to trade Bitcoin futures with low commissions and high security guarantee.

Benefits of cryptocurrency futures

The advantages that explain the high volume of trading and the large number of followers of this type of contract are many.

  • High liquidity. The trading volume of futures contracts is higher than trading directly in cryptocurrencies. 
  • Possibility of hedging. If you own a cryptocurrency, you can hedge against its decline by simultaneously opening a short position on futures. Regardless of the price dynamics, the fall of the currency will be compensated by the profit on the corresponding contract. Miners who do not sell their stocks do the same. Stable income can be guaranteed by hedging.
  • Portfolio diversification. The trader receives access to a variety of assets.
  • Low commissions. Almost all exchanges establish lower commissions on futures transactions than on the spot market. And it helps to multiply your profits – because the transaction price is lower. The low commissions are due to the fact that the technical part of the contract is quite simple, it is completely virtual, the exchanges do not have to work with the blockchain and, therefore, there is no need to pay commissions.
  • Leverage trading. Futures trading allows you to increase the purchasing power of your capital.

Disadvantages of futures contracts

The most obvious drawbacks of such trades are: high volatility:

  • High volatility. Although volatility is precisely what traders want, it makes it difficult to analyze the market situation and adds to the possibility of losses.
  • Risks. New traders who trade with high leverage are most often exposed to this risk. Occasionally they don’t fully understand how the leverage functions and thus they quickly lose their money.
  • Possible decrease in positions. Any unexpected price movements can turn a profitable position into a losing one instantly. In the cryptocurrency market, volatility and manipulation are an integral part of the trading process.

To summarize

Despite the high risk, futures trading on cryptocurrency exchanges is becoming increasingly popular. In this article, we’ve looked at what cryptocurrency futures are, what they are, and where they can be traded. Every trader must decide for himself whether this financial instrument is of interest to him. 

Carefully analyze all the advantages and disadvantages of this instrument, weigh all the possible risks and do not forget to develop your trading plan, which will help you to succeed in the field of trading.

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