Markets for spot, forwards, and futures are the three main avenues to invest in cryptocurrencies. Futures investment, the subject of this essay, may be found in several markets, including equities, commodities, currencies, and cryptocurrencies, but it is not for novices. Many young investors are drawn to futures trading because it allows them to increase their leverage on futures contracts and get a higher return on investment.
How Do Crypto Futures Contracts Work?
Contracts for future delivery of an item at a predetermined price are known as futures contracts. Soybeans, coffee, oil, individual stocks, ETFs, cryptocurrencies, and other commodities are examples of such assets. Futures contracts are usually traded on a stock market.
It entails a party agreeing to acquire a specified amount of securities or commodities and receive delivery on a certain date. The selling party provides it. Futures contracts are identical to forward contracts, except they are openly traded and cannot be modified (Standardized in their specified contract size and settlement procedures).
How do they function?
Futures contracts enable investors to lock in a price and protect themselves from large price movements, whether bullish or negative. Let’s look at an example:
An investor can enter into a purchase futures contract if they feel the price of Bitcoin is likely to rise in the future. The investor will benefit from the price rise of Bitcoin based on the margin and leverage employed in the contract.
Similarly, if an investor feels the price of Bitcoin will fall, as has been the case in recent weeks, the investor may enter a sell futures contract, and if the price falls, the investor will earn based on the margin and leverage employed.
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Basics of Futures Trading
A real-world example is the greatest way to illustrate futures contracts. Let’s say the price of a crypto asset is $1,000 USDT. A trader feels the asset’s value will rise and seeks to purchase five futures contracts. The position now has a value of USDT 5,000. The trader was correct, and each contract now has a value of USDT 2,000. The trader may now sell the five futures for a total of USDT 10,000, earning USDT 5,000 in profit.
The same principle applies to shorts. Instead of purchasing, the trader sells five futures contracts for USDT 1,000 apiece, totaling USDT 5000 in position value. The trader repurchases the initial five contracts for a total value of USDT 2,500 after a USDT 500 price reduction, retaining USDT 2,500 as profit.
His strategy may appeal to some more than purchasing Digital Tokens altogether. The relatively intricate storage of Digital Tokens is, first and foremost, a considerable barrier to admission.
This problem is alleviated in futures trading since the exchange provides proper custody and, in many situations, futures contracts are cash-settled contracts, which eliminates the need for custodial services. Another factor is that institutional traders are involved. Because futures trading regulations are similar in conventional financial markets and on a Digital Token exchange, these traders are significantly more comfortable trading a Derivative Product.
Crypto futures are an intriguing hedging option for expert traders. Traders already exposed to Digital Tokens might take an opposing position in the futures contract to protect themselves from price swings.
Users may also obtain market exposure to crypto-assets via futures, which is a capital-efficient method. With collateral set upon position entrance, any loss is already factored in. Furthermore, by getting funds, futures enable traders to participate in a carry strategy.
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How to Trade in Futures
You may go Long or Short with futures contracts.
You enter a contract that represents your bullish view when you feel the price of an asset will rise. Long, it’s your turn. This contract enables you to purchase bitcoin at a preset price in the future.
You go Short if you believe the price will fall. You sign a contract that allows you to sell bitcoin at a later date.
Knowing how to trade futures is unquestionably advantageous. It would help if you also understood why you’re trading them. What are the benefits of using them instead of just purchasing, owning, and selling digital assets?
Futures’ value movements are substantially larger than those of the underlying asset. You may also be able to improve risk/profitability by using leverage.
Bitcoin futures enable you to profit on price drops in bitcoin.
Where Can You Buy Bitcoin Crypto Futures?
It’s just as crucial to know where to trade as it is to know how to trade futures. It’s critical to pick a reputable exchange with strong security and a user-friendly interface. It’s also crucial to ensure that your trading gains aren’t sucked dry by costs. Before starting trading, do some research to ensure you’ve picked a platform that will suit your needs.