What are the differences between crypto futures and traditional futures? All matters related to money need careful consideration and when it comes to making any investment you should be all the more careful so that you get the desired returns on your investment.
For that matter, it is very important to know how exactly the financial world is changing and choose the best options to ensure that your portfolio keeps growing.
One of the most popular and widely used techniques is futures trading. This well-known trading method is very useful because it will not only keep your portfolio growing but will also outperform in a short time.
Two popular futures trading options are crypto futures and traditional futures. The traditional futures have been in the market since ancient times.
In fact, the first recorded futures trade was supposed to happen in 1710.
However, modern futures trading includes several different products including cryptocurrencies, which are as popular and soared to great heights as the other traditional futures options.
However, trading with crypto futures and traditional futures is not the same though the fundamentals behind both these forms of trading offer the investors pretty similar attributes.
If you want to make the right choice as well as excel in whichever trading option you choose, it is elementary that you will need to know the basic differences between traditional futures and crypto futures trades.
This is the right place to be for that because this article will tell you all about it.
Crypto Futures vs Traditional Futures – The Differences
In this article, you will come to know about the basic differences between traditional futures and crypto futures as well as a few more things that are beyond the basics of these two forms.
This will enhance your knowledge and enhance your confidence while trading and even allow you to expect to get the returns as desired.
Without any further waste of words, here they are.
Before you start it is important for you to know about the futures contract. These are actually legal agreements made between the parties who are willing to sell or purchase an asset at a future date.
This means that the initial investment required in futures trading is not for buying the asset but the contract representing the underlying asset.
In the case of traditional futures, the contract is made to buy or sell commodities such as gold or crude oil as well as financial assets such as stocks and bonds.
On the other hand, the concept involved in crypto futures is the same as traditional futures. Like the traditional futures, the contract for crypto futures also refers to the predetermined agreement to buy or sell a crypto asset, long or short.
However, the only difference is that in this case, the underlying assets in the contract represent crypto coins only. This can be of any type such as Bitcoin, Ethereum, Doge, and any other Altcoin.
The exchanges that allow traditional futures trading have specific financial and legal requirements and are also protected by gatekeepers. There may also be some restrictions imposed based on the geographic location.
These exchanges are indirect to the users and you will need a broker or a middleman to facilitate your transaction. All these make the traditional futures trading process much slower.
On the other hand, to deal with crypto futures, all you need is a system and a strong internet connection to access the online crypto exchanges.
They are open to any user who is willing to take part in crypto trading and ensure a faster and simpler process since they offer a P2P platform mainly to make a transaction.
There is no requirement of a middleman between the exchange and the investor and therefore the crypto futures trading process is pretty fast.
The crypto exchanges are open around the clock and for 365 days which means that you can make the best out of the market changes at any point of time, even on holidays.
This means that you will be able to stay in tune with the performance of the market as well as get a better insight into the crypto assets at any given time of the day, week, month, or year.
However, this is not possible on the traditional futures exchanges that are typically closed on the weekends. Also, the traditional futures exchanges and markets are closed for 13.5 hours in a day.
This means that you will not be able to trade assets or change your position even if there is a major external incident that may affect the price of the underlying asset of your traditional futures contract.
In the case of precious assets such as gold or oil, you will have to work closely with others in order to ensure that your futures contract is secure.
There is a significant difference in the market structures of traditional futures and crypto futures though they are used in the same circumstances. The traditional futures market is strictly regulated.
There are specific laws and standards designed and are in place in the traditional markets. This ensures the legitimacy of the traditional futures exchanges and at the same time protects the investors against any sort of market abuse, fraudulent acts and behavior, and thefts.
This means that when you choose a futures exchange it must be approved and the rules and regulations that you need to follow may slow down the trading process.
On the other hand, the crypto market, as you may know, is not regulated by any central authority and the same applies to crypto futures trading as well.
This means that crypto futures trading does not have proper and secure regulatory approval for it. However, the trading process is much faster in comparison to trading traditional futures which gives rise to newer options.
It is due to the unregulated structure of the crypto market which also allows making perpetual swaps by the investors, which typically does not have any expiry date, as mentioned earlier.
Trading traditional futures and crypto futures will also be affected by the size of these two markets. As per records, the traditional futures exchanges are much larger in size than the crypto futures exchanges.
Some of the top traditional futures exchanges are worth tens to hundreds of billions of dollars. This huge size of the market is due to the participation of the institutional investors, larger corporations, as well as private investors with significant resources. They participate in the traditional futures exchanges daily.
On the other hand, the crypto futures market is not as big as the traditional futures market. This is because the participation of big players and institutions is relatively less.
This market is dominated mainly by the private investors. However, this field has also started to attract a few major institutional investors as crypto coins such as Bitcoin and Ethereum step into the mainstream market of late. It is now recognized as an alternative asset class.
You can also differentiate between crypto futures and traditional futures based on the expenses incurred in making such trades.
In the case of the crypto futures trading, you will usually need to pay a commission of up to a specific percentage depending on the type of underlying asset of the contract.
However, after you make the purchase, you will not be charged anything for holding the assets for the time you want. Moreover, the fees paid by the customers on these futures exchanges are small and therefore it will not be costly to hold a position for a long time.
On the other hand, the commissions and fees charged for trading traditional futures are not as low as trading crypto futures and therefore you may end up paying more.
Holding your position for a longer period of time may at times cost you more than the commissions that you may have to pay for the purchase of the contract.
In traditional futures trading, the liability is more of the investors. It is required by them to make sure that their account is solvent. Moreover, they must also make sure that the margin calls are issued by the broker.
Herein, the user is asked to top up margin when a position that is leveraged moves in the wrong direction. Typically, a reliable traditional future exchange will check the margin of the investors at least once or twice a day.
This they do to check whether the users have gone negative and are in a position where they owe money to the broker or the Futures Commission Merchant.
There are several instances in the traditional futures scenario where the retail users typically owe more money to the brokers than they actually have.
On the other hand, the exchanges for crypto futures trading typically follow a different type of approach. This is called the ‘Do not trust, verify’ approach.
Here the margin of the user is checked and variation margin adjustments are made in real time. The position is liquidated if it goes the wrong way.
This may be done in parts depending on the financial situation of the end user. Settlements can be made a couple of days later after confirming whether the end user, who may be in distant parts of the world, wants to hold on to their position or simply let their account blow up.
This limits the risks and is very useful for the newcomers to this field who take on an extremely leveraged long or short position without understanding the consequences of it.
They do not have to worry about going personally bankrupt while experimenting with things that they do not understand fully yet.
The contract sizes of traditional futures are quite large and may often run up to 50 pages which you will get after going through a lot of paperwork and hassles that may take several weeks to get completed.
On the other hand, as for the crypto futures, the crypto exchanges offer a pretty small contract to the investors. However, this does not mean it will be unsafe. In fact, you will even be allowed to trade with minimal capital.
Moreover, due to the blockchain technology involved in the underlying transactions, these are more transparent and will meet all the necessary compliance obligations.
This will not need you to go through extensive paperwork, long time, and hassles to provide personally identifiable information. It will in turn reduce the cost and friction.
Which is Better – Crypto Futures or Traditional Futures?
This is a difficult question to answer because both crypto futures and traditional futures trading are good to go for by the virtue of their respective characteristics.
However, you may find one of them to be more suitable to your needs and preferences if you look over and above the differences between them.
Cryptocurrencies as such have brought in revolutions in the payment technology, cryptography, and several different aspects of finance.
Similarly, crypto futures exchanges and futures trading will also revolutionize the trading process allowing people to access new generation traders all over the world.
It offers a lot of advantages which appeal to all traders, new or veteran, big and small.
As it is the futures markets and trading both are complex especially to the ordinary investors.
They may find themselves in an alien territory if they do not have a deeper understanding of the features, inherent issues, the risks involved and the rewards offered as well as the volatility, time to expiration, and the current events.
On the other hand, when a trader has such knowledge, it will be easier to stay on the top of things at all times and be prepared to purchase or sell on short notice.
However, if you choose to go with crypto futures trading, there is another significant thing that you need to remember, especially if you intend to deal with Bitcoin Futures.
It is that if you do not own actual Bitcoin you will not be eligible to receive the free coin that may be issued when the coin forks.
These forks are a type of stock split. These happen when you meet a complex set of conditions and the big players or developers agree to amend the algorithm to expedite the transaction process as the trading volume grows.
Also, if you do not want to make any volatile investments you should not choose crypto futures for yourself.
You will need to use an online crypto exchange to deal with crypto futures. On the other hand, you will need to use a traditional futures broker for trading traditional futures.
The crypto exchanges allow the investors to trade crypto futures on the basis of perpetual or quarterly contracts.
For example, in Binance Futures, you can use a quarterly contract that expires in three months after the date of its issuance.
However, on the other hand, the perpetual contracts do not usually have an expiry date.
Ideally, you should go for any type of futures trading, crypto or traditional, if you are willing to take on risks and have the guts to buy and sell frequently.
It is good for sophisticated traders only and not for average investors who should go for spot trading instead.
The most significant reason to take part in a traditional futures contract is to have the ability to use leverage for your investment.
This leverage refers to the borrowed funds that you use to buy the asset and multiply the return on your investment at the same time as well.
This enhances your chances to make more profits as well as increases the potential for greater liability.
This is because leverage can work in both directions.
The traditional futures trades are made by the accredited investors most of the time.
They are the ones who typically have considerable financial resources.
Traditional futures trading comes with its own share of risks and this means that if you are an aspiring trader and want to get involved in traditional futures trading you will have to be well-capitalized.
This will help you in avoiding the margin calls, which is the cost of maintaining your margin in a losing position.
If you fail to meet this set margin, the future broker may have to initiate a force-close on the losing positions.
Now, some similarities between crypto futures and traditional futures trading will also help you a lot in making the right choice.
Ideally, traders enter into a crypto futures contract or traditional futures contract specifically for two reasons which are speculation and hedging.
Irrespective of the type of futures contracts, the futures market is reactive to speculation.
This is based on the provenance of the value of an asset in the future.
If the speculation is strong, it gives the investors a good enough reason to take on riskier bets because they believe that the price of the asset will continue to rise in the future.
It is then they enter into a futures contract, crypto or traditional, with a long position.
If the prediction is correct, the long position will pay off well since the value of the underlying asset in the contract will appreciate over time.
As opposed to speculation, futures contracts can also be used as a hedge against the underlying asset.
When the investors believe that the market is having a Bear Run, such futures contracts will protect their portfolio when the price of the particular asset falls.
This will enable them to prevent incurring losses in the short term and may even make some money when the price falls.
Hedging in the traditional market works in the same way as it works in the crypto market.
Hedging helps the investors to cover their portfolio against market bubbles, failures, large capitulations, and even unexpected events.
These futures contracts will act much like an insurance cover that will help the investors to manage their finances.
And, when leverage is added to the hedge, the full value of a portfolio can be protected.
Therefore, consider your needs when you make your choice between crypto futures and traditional futures trading.
You may take the help of an experienced financial advisor for that matter if you are still unsure.
The advisors will help you to know all other important aspects as well such as the standalone value of the underlying asset of the futures contract as well as the market cycles related to that particular product.
They will also protect you from being burnt by the over-leveraged markets that can liquidate the assets quickly.
You will also be able to formulate a wise, well-planned, and more productive strategy to reap maximum benefits from crypto or traditional futures trading with the help of these experts.
Irrespective of the asset you want to trade in, you must know the differences between crypto futures trading and traditional futures trading to achieve your investment goals. This article must have surely helped you a lot in that aspect.