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Cryptocurrency futures are one of the most popular digital trading tools today. Futures is a very well-known type of derivative contract agreement in the world. However, crypto futures became popular just a couple of years ago. And crypto futures trading is getting more and more popular.
Crypto Futures Trading for Beginners
In this article, we will help you to understand what are cryptocurrency futures, and how to start crypto futures trading. Also, we will take a look at the crypto futures trading risks.
What is Crypto Futures
Futures contracts or crypto futures are a type of financial derivative. It is a contract agreement to buy or sell an asset at a predetermined time and price. As with margin trading, stocks, commodities, and cryptocurrencies can act as assets. On the expiration date of the futures (the date of expiration of the contract), the parties must fulfil their obligations regardless of the market price of the purchase at that time.
Unlike spot and margin trading, when trading crypto futures, a trader who is not the direct holder of an asset can open long or short positions. If you have a futures contract, you do not need to own an asset to speculate on its price. And it is one of the most significant advantages of crypto futures trading.
Crypto Futures Types
There are standard and perpetual cryptocurrency futures. Let’s take a closer look at the details of each type.
Standard Contracts
The standard futures are those that have a due date. They can be divided into two groups: delivery and settlement contracts.
Delivery contracts involve the delivery of financial instruments or commodities at a specified time and a fixed price. This type of contract is focused on a fixed-price delivery date. If the seller does not provide the financial instruments or commodities to the buyer on time, the exchange must impose a “penalty” on the seller.
A settlement contract is a type of contract with a simple settlement without delivery of the underlying asset. In such contracts, brokers calculate the difference between the purchase price and the price at the expiration moment.
Perpetual Contracts
Perpetual futures are similar to classic futures but without an expiration date. Such contracts can be traded non-stop. Profit from perpetual trading contracts accumulates from the payments at the funding rate, which pivots on the price at the entry moment.
Funding rate or funding is a periodic payment to crypto traders with short and long positions determined by the difference between the price of an asset in the contract and in the spot market.
The perpetual futures allow traders to gain and keep the price of the underlying asset in the futures contract close to the market price. If cryptocurrency prices go up, traders with short positions pay traders with long positions. And if prices go down, traders with long positions pay traders with short positions
Crypto Futures Trading vs Spot Trading
There are 4 main differences between Spot trading and futures trading.
- Leverage. This tool in trading futures contracts allows you to increase the efficiency of capital. With this option, you can open a position for 1 BTC or any other crypto using only a part of the coin value. Leverage is not used for spot trading, so you will receive exactly as many crypto assets as they correspond to fiats.
- Flexibility when placing short or long positions. Buying cryptocurrency and holding it on the spot wallet will provide an opportunity to earn capital gains if the asset price increases. Short selling in crypto futures trading allows traders to earn even if the value goes down.
- Liquidity. The futures market is characterized by high liquidity. The monthly trading volume here is measured in trillions of dollars. Thanks to this feature, the process of determining the value is improved, which allows traders to effectively and quickly conclude transactions.
- Prices. Quotes are calculated based on supply and demand. This affects how much you can buy cryptocurrency. The price on the spot crypto market is the basis for all transactions. The futures price consists of the underlying spot price plus the futures premium. The premium can be either positive or negative. A positive sign indicates that the contract price is higher than the spot price. And it works the same way in the opposite direction: a negative premium is a sign that the futures price is lower than the spot one.
Where to Trade Crypto Futures
There are several trading platforms where you can start crypto futures trading. The most popular are MEXC, BINANCE, and ByBit. Those platforms often offer different benefits for their users.
