Digital currencies have become popular as trading assets in recent years. More people look forward to capitalizing on the great gains that crypto volatility provides. There are several ways to do so, and one of them is through futures contracts. In this article, we’ll check out the advantages of trading crypto futures.
Let’s figure out what is futures trading. Futures contracts for cryptocurrency allow traders to buy or sell a certain cryptocurrency at a predetermined price and date in the future. For instance, futures on Bitcoin means the buyer agrees to purchase BTC at a specific price at a predetermined date. Futures contracts are standardized agreements traded on exchanges and used by traders to speculate on cryptocurrency price movements.
The mechanics of how cryptocurrency futures work are simple. Assume that a trader believes that the price of Bitcoin will rise in the next months, so they are interested in BTC’s future contract. Investors can purchase a Bitcoin futures contract, which allows them to buy Bitcoin at a set price on a specific date in the future.
If the trader is correct and the Bitcoin’s value rises, they can sell the futures contract before the expiration date and gain great profit. If Bitcoin’s value drops, the trader loses money if they sell the futures contract before expiration.
Futures enable traders to use leverage. It’s a method to trade large amounts of coin without having a big initial capital. For instance, with a leverage ratio of 20:1, a trader can invest $500 yet trade $10,000 in crypto. But this is also the danger of futures trading with leverage: if you lose, you must repay more than you have invested.
Traders use two options to settle future trading contracts:
- Cash, when the underlying cryptocurrency is settled in cash at the expiration date in a cash-settled futures contract
- Physical delivery, when upon the expiration date of a settled futures contract, the traded crypto is transferred to the buyer or seller.
Overall, trading futures offers many benefits to traders. These contracts enable trade on leverage, give access to multiple markets and greater liquidity, etc.
As mentioned, trading futures in crypto offers great opportunities and benefits. Even people with a smaller initial investment can enter the market and gain profit thanks to leverage. However, it’s worth mentioning that crypto futures trading is risky due to crypto’s volatility and relative unpredictability. Thus, be careful when trading futures, especially with leverage. Let’s now check all the pros of this trading solution.
Leverage is what allows traders to generate greater profits from speculating with crypto futures contracts. Even with the minimal cash they invest, it is incredibly appealing to use this solution, especially for people with greater knowledge of the market.
Leverage is what increases the initial investment and enables the trader to speculate on the digital currency’s price and get great rewards. Leverage depends on the exchange platform, and it could range from the minimal one up to 20 and more. However, leverage can multiply gains but also amplify losses, so it must be used with caution.
Crypto futures contracts make traders more versatile in their trading tactics. One of the most basic examples is that a trader in the crypto futures market can easily go short on an asset if they believe the value of that coin will fall in the near future.
In the case of spot or margin trading, this would not have been as simple to pull off. The flexibility factor also allows individuals to implement scalping methods in the market. TScalping means making numerous trades depending on small price movements. This strategy requires attention but offers great profits.
The method to hedge your positions is another vital advantage of trading crypto futures. Hedging is a tactic used to safeguard against price fluctuations, which are significant in the crypto market. Futures contracts enable traders to enter positions that mitigate the risks of their current positions. For example, if a trader has a big amount of Bitcoin and is worried about a price drop, they can sell Bitcoin futures to cover any losses.
Trading cryptocurrency futures also provides traders with access to numerous markets. Futures contracts are available in several popular cryptocurrencies. Some of the most noteworthy examples include Bitcoin, Ethereum, Litecoin, Solana, Cardano, Doge, Tether, etc. Such a possibility offers a chance to traders since they may profit from price changes in numerous markets and diversify their portfolios to safeguard their losses.
Crypto futures contracts offer better liquidity than cryptocurrencies. These contracts are standardized and transacted on exchanges. Thus, individuals enter and exit trades easily and more effectively, without the hustle of trying to find a buyer or seller.
Crypto futures trading aid in price discovery. Futures contracts are traded based on the underlying asset’s projected price at a future date. It means that futures trading can provide valuable information regarding cryptocurrency prices in the future.