What Is Futures Trading in Crypto and How Does It Work

Jay Crypto

Blogger

Futures trading is one of the most popular and convenient methods of trading cryptocurrencies where investors speculate on the future price of a digital currency like Bitcoin. Future trading involves the use of futures contracts where investors bet on the future price of a cryptocurrency without actually owning or holding the cryptocurrency.

What is futures trading?

Futures trading in cryptocurrencies refers to an agreement between two parties to buy or sell a specific cryptocurrency at a predetermined date and time based on the future price of a cryptocurrency. For example, let's assume the price of cryptocurrency "Y" is $3,000. You want to buy 50 tokens of this cryptocurrency and it costs you $3500 per token. The total price of these tokens sums up to $175,000. As we know, the price of cryptocurrencies keeps fluctuating and if it increases to $4,000 per token in six months, you will have made $25,000 ($200,000 for 50 tokens). Conversely, if you want to sell a futures contract, you can fix the price at $175,000. If the price drops to $2,500 per token ($125,000 for 50 tokens), you can still sell at $175,000 ($3,500 per token). This method of crypto trading allows you to speculate on the future price of a particular cryptocurrency instead of holding it and it can help you avoid losses due to price fluctuations of cryptocurrencies.

How does futures trading work?

Basically, futures trading involves buying and selling futures contracts while speculating on the future price of a particular cryptocurrency like Ethereum. Let's discuss the main components of a futures trade.

I. Expiration date

The expiration date of the futures contract is a predetermined date when both buying and selling parties agree to settle the contract. However, with mutual agreement, they can sell this contract to other investors before the settlement date.

II. Units per contract

Units per contract is the amount of cryptocurrency that is represented by a single futures contract. The units per contract value can vary depending on the exchange and the specific futures contract being traded.

III. Leverage

Leverage is an important component of futures trading. For example, the current price of Bitcoin is $28,665. In spot trading, you have to pay the full amount of Bitcoin to own one coin. However, in futures trading, investors get the same coin by paying just a small amount of its original price.

How to trade crypto futures

Crypto futures trade, like any other trade, is not without risks. However, a better understanding of the crypto market with the right investment strategies can help traders minimize their potential losses. For beginners who want to enter cryptocurrency futures trading, here are some tips to avoid losing your valuable assets.

I. Learn the basics

If you are a beginner and don’t know much about futures trading, learn the basic concepts first. Learn how futures trading is different from spot trading and what risks are associated with it. Keep an eye on the market and learn about the latest trends in the crypto sphere.

II. Choose a trading strategy

Choosing the right trading strategy is important while trading these highly volatile crypto assets. Make a sound trading strategy that best suits your personality based on risk tolerance, long-term goals and financial aims. Developing a flexible trading strategy helps you in adapting to changing market conditions and adjusting your strategies accordingly.

III. Learn how to interpret technical charts

Interpreting charts and patterns of the crypto market is an important skill because it helps you to analyze the market and make predictions about the price fluctuations of the cryptocurrencies. Learning how to interpret charts such as technical analysis charts can help in managing risks and making informed investment decisions.

IV. Review the various exchanges

You should not limit your trading activities to a single exchange. There are thousands of crypto exchanges in the market, and expanding your trading activities across multiple exchanges can offer you a broader range of altcoins and better trading opportunities.

Where to trade cryptocurrency futures?

With the increasing popularity of cryptocurrencies, competition among trading platforms is increasing, and each platform is attempting to deliver the greatest deals and services to its users. Choosing the right exchange for futures trades might be a tough task for beginners and to solve this problem, here we list the top exchanges for trading cryptocurrency futures.

I. Kraken

Founded in 2011, Kraken is a US-based crypto exchange with advanced trading features. Established just two years after Bitcoin's inception, it is one the oldest crypto exchanges in the crypto world.

Margin trading, stop-loss orders, and conditional close orders are some advanced trading tools that make it one of the top choices for crypto futures trading. Some of the limitations of Kraken include the unavailability of futures trading in the US, limited leverage options, and limited support of fiat currencies.

II. Bybit

Founded in 2018, Bybit is a popular crypto exchange headquartered in Dubai. Bybit's integration with Tradingview made it easier for its users to get real-time alerts when the market satisfies their defined criteria.

Bybit is an excellent platform for futures trading as it offers 100x leverage on Bitcoin and 50x leverage on other currencies. Users can also take advantage of short-term insurance against losses. However, it is a bit complicated for beginners and there are also limited options for fiat deposits.

III. Binance

Launched in 2017, Binance is the largest crypto exchange in the world in trading volume and assets under management. Low trading fees, a generously wide range of leverage, and high liquidity are some of the key features that make it the favorite choice of the users.

Users have the choice to choose trade between quarterly and perpetual futures contracts. However, Binance doesn’t operate in the US and it has a limited range of future contracts.

IV. KuCoin

KuCoin is another popular crypto exchange that allows you to buy, sell, and trade Bitcoin, Ethereum, and more than 700 altcoins. Launched in 2017, It offers a wide range of trading options including futures trading.

KuCoin charges very low trading fees as compared to the other competitors which may charge up to 0.50% against each trade. While KuCoin offers a range of benefits for futures trading, there are also some limitations to be aware of such as limited liquidity, limited pairs and being highly under-regulated in the US.

Risks of trading cryptocurrency futures

Futures trading in crypto comes with its share of the dark side as well. Futures trading, just like any other trading, carries risks and some of these risks are described here.

I. Volatility Risk

There is no doubt that the crypto market is highly volatile and is subjected to sudden price fluctuations. A sudden movement in an asset’s price may result in a huge loss of your crypto assets if your position is not well managed.

II. Leverage risks

There are also leverage risks associated with futures trading and these leverages may result in huge profits or losses. This means that although traders can make significant profits with a small amount of capital, they can also lose all of their assets very quickly.

III. Liquidity risks

The liquidity of futures contracts might be limited, which means that there may not be enough buyers or sellers at a specific time and this could result in slippage, which is when the execution price differs from the expected price.

Conclusion

Futures trading of cryptocurrencies has become widely popular in recent times. However, traders must be fully aware of the risks associated with futures trading to guarantee high returns and avoid potential losses.