What is crypto futures trading and its benefits? Over the years, crypto coins, especially Bitcoin and Ethereum, have grown exponentially and have almost become mainstream. Its prevalence is seen everywhere, including the media.
This has attracted newcomers to try their luck. The crypto exchanges are also on the lookout to make the most of this growing interest among people and have started offering several options to trade crypto coins apart from the basics.
One such option is spot trading, which is a popular option among those people who are risk averse and are reluctant to buy crypto coins and hold them for a long period of time.
However, the crypto market also offers another good option to make money from this space via futures trading, especially to those people who have a higher risk tolerance.
This is an article that will let you know all about crypto futures trading before you get started with it and be confident in your trading activities.
With this knowledge you will not experience the disastrous effects that high levels of volatility of crypto coins may offer.
Instead, you will be able to maximize your chances to take advantage of the crypto futures trading opportunity to make high profits.
What is Crypto Futures Trading and Its Benefits
In this option, traders are able to capitalize on the current market trends and price movements.
However, if you are a beginner and want to try your luck in crypto futures trading, do not jump into the bandwagon right away.
You should first gain some knowledge about the concept, the benefits, and the steps that you should follow in order to be successful in your endeavor.
Crypto futures trading is a concept that is completely different in comparison to spot trading, not only in their names but in several other aspects as well.
Futures contracts are actually an agreement. According to this agreement, you are supposed to buy or sell a specific type of crypto coin that is mentioned in the contract at a fixed price sometime in the future date as agreed in the contract.
This is one of the most popular crypto trading options followed by those traders who want to take risks and use it as an alternative to hedge other investments.
In this process they, typically, have to lock in profits while trading in the crypto market which is extremely volatile.
First and most importantly, in this option of crypto trading, you do not need to actually hold any digital asset to take part in it.
Instead of that, all you have to do is buy or sell derivatives contracts.
These derivatives contracts are those that correspond to the value of a given crypto asset that it can have at some point in the future.
This means that, in crypto futures trading, you essentially have to speculate on the value of a specific crypto coin that it can reach up to in the future.
The good thing about crypto futures trading is that you can choose any one of the two ways mentioned below to participate according to your convenience, which are:
- One – you can go long to speculate on a price of a crypto coin in advance
- Two – you can go short on your position if you anticipate that there will be a drop in price of the specific crypto coin in the future.
Therefore, it can be said that in crypto futures trading you especially deal with crypto derivatives as a trader and your main objective is to speculate on the price of a digital asset in the future.
You may know that Bitcoin and any other type of digital currencies are extremely volatile investments.
Most of the people who trade with crypto try to manage this risk by simply buying a particular type of crypto coin when the price of it is down and selling it off as and when the price goes up to make profits.
However, there is a specific drawback of this tactic.
That is, more often than not, a lot of things are left on the table especially when you sell the particular crypto coins and leave the market.
Chances are high, since crypto prices are extremely volatile as said earlier, that the prices of the specific crypto coin you sold off continues to rise after you leave the market.
In such a situation you will miss out on the opportunity to make more profits by simply keeping your position open for a longer period of time.
This means, with crypto futures trading, you will not have to worry about missing out on any opportune moments.
One of the most significant benefits of crypto futures trading is that when you deal with a particular product, it will offer you more chances to make profits as well as the immense potential to grow your crypto portfolio at the same time by using leverage.
While using leverage via crypto futures trading you will get an opportunity to maximize the returns on your investment.
You can use several advanced trading strategies to swell your profits and all you have to do for that is use the futures to guess on the direction in which the crypto market would move.
This will allow you to minimize your risks in trading and for that you do not have to hold a lot of crypto coins all the time you hold your position as you would have to do on a spot exchange.
Apart from that, crypto futures trading can also help you to protect your crypto portfolio and at the same time it will also serve as a hedging policy.
This will be extremely helpful during those times when you find that your crypto investments are not doing well and are typically moving in the wrong direction.
During these times, with crypto futures trading, you will be able to hedge your current spot positions and for that you do not need to buy any additional crypto coins, as said earlier.
This means that crypto futures trading will make you more agile and you will be well prepared to take on the changes in the market, whatever it is, and make the best out of the opportunities.
Typically, crypto futures trading is all about entering into a ‘contract,’ as mentioned before. Therefore, it is elementary that you should understand the details in the contract specifically if you want to be successful in this form of crypto trading.
First, you should understand the different types of currency pairs offered by the exchange in futures trading. This may include and not limit to:
Next, you should have a very clear understanding of the time frame. You can choose anyone of the following according to your wish and convenience:
Then you should know about the unit size of the contract which can be either whole or fractional for example, 1 USD for BTC/USD currency pair or 0.01 ETH for ETH/EURO currency pair. Check that with the crypto exchange precisely.
In addition to that, to take part in a futures contract you should also have a very clear understanding of:
- The collateral
- The type
- The leverage offered and
- The fees charged.
Most importantly, check on the settlement process followed by the crypto exchange on maturity.
A few crypto exchanges may settle your claims for profits on trading instantly while in some others it may not be available so quickly.
Remember, all crypto exchanges may not have the same format or parameters in their contract. Therefore, research well.
As said earlier, one of the most significant benefits of futures trading is that you can get high leverage.
This will allow you to improve your capital efficiency.
The primary reason behind this is that you will not have to lock up your entire capital amount to take part in crypto futures trading.
However, this process increases both the risks as well as the potential returns which is why this is an option that should be followed by those traders who are risk averse and also exercise extreme caution while trading crypto.
If you are new to crypto futures trading, you can expect to have leverage anywhere from 2 to 5 times, especially when you want to use this option as a protective hedge for your portfolio.
Assuming that a particular asset in your crypto portfolio moves in the opposite direction than what you speculated or is performing poorly, a futures trade can hedge this outcome by offering a specific amount of leverage.
This will help you to compensate for the losses incurred.
Therefore, the most significant benefit of crypto futures trading is that it will provide you with more potential and opportunities to grow your crypto portfolio, sometimes up to multiple times with just a single trade.
Another significant benefit of crypto futures trading is that you can even make profit on your sales even when the price of a particular crypto asset is falling. All you have to do is short the market.
This will provide you with more fluidity as well as a lot of freedom to contemplate on what the price action of a particular crypto coin will be in the near future.
Add to that, crypto future trading can also help in stabilizing price fluctuations. This is because in any market it is the long term views of the traders that play an important role.
In this form of trading, you are typically more focused on the core of your business which, in turn, helps you to smoothen up your exposure.
This is applicable to anyone involved in a crypto market whether it is a miner who is expecting a Bitcoin flow or a crypto ATM operator who needs to manage the inventory.
Steps to Follow
Before you start to trade with crypto futures, you should be very clear about the crypto products that you want to deal with and enter into a contract.
Experts suggest that you should always trade with crypto futures products that are regulated.
Therefore, choosing the right crypto exchange and understanding their contract details is the first important step.
You will need to do some research on it and do not rush to make any final decision.
Always choose a crypto exchange that offers access to regulated futures products and are also known for their dedication to provide a diverse but dependable solution for crypto futures trading all over the world.
Understanding the market is the next vital thing to do because crypto futures trading is not an easy endeavor to pursue for many.
You will take some time to understand the ups, down, and trends followed in the market as well as study the price movements.
Going through different analysis reports will help you to understand a lot of things such as:
- How exactly the market adjusts to the changes over time
- How do the external factors cause such changes and how it affects the market and
- How exactly you can manage the risks and lots more.
You will also need to follow a specific and proven strategic approach to trade crypto futures.
This is extremely necessary because you will need to gather a huge amount of information and if you do not have a proper knowledge as to how you should go ahead with crypto futures trading, you will eventually struggle to get through or even leave the market.
You must follow a proper methodology to trade your crypto futures.
This method should work well and you may even have to personalize it so that it fits your:
- Trading style
- Risk Tolerance
- Psychological traits
- Lifestyle and
- The long-term plans.
In order to create a proper and suitable crypto futures trading methodology you will need to keep a few specific points in mind. The list includes and is not limited to:
- Identifying your particular trader personality
- Determining your goals
- Defining different trading parameters according to your risk tolerance and financial objectives and
- Evaluating your performance on a regular basis as well as that of each parameter so that it matches your personality.
This will allow you to know if and when you need to make any adjustments in your trading strategy and in case you face any problems while trading, you will know how exactly you should deal with them to be successful.
You must also have a very clear and concise trading plan in place.
This will allow you to manage the risks involved in crypto futures trading in a much better way. And, along with that, it will also help you to improve your trading consistency.
When you build your trading plan for crypto futures, you must make sure that you have a detailed layout and include a few specific points along with others such as:
- How to enter and exit positions
- The entry and exit indicators
- Stop loss placements and
- The size of your positions.
The advantages you will enjoy when you have such a trading plan are many and the most significant one include lowering your stress level all through the crypto futures trading process.
It will also ensure that you do not miss out on any trade and you will be more conscious and cautious about your trading habits.
You will be able to treat your trading more seriously which will ensure exceedingly targeted developments.
You must also have a proper risk management strategy in place so that you are well aware of and be able to deal with both the acceptable and unacceptable losses that you may incur while trading your crypto futures.
Make sure that you do not ignore the small amounts that you can win because this will prove to be extremely vital to build a proper crypto account over time.
Apart from that, proper risk management strategies will also help you to:
- Protect your capital
- Have and follow more realistic expectations and
- Prevent emotions to influence and run your trades.
It is needless to say that you should always trade responsibly. Remember, crypto futures trading is not a form of gambling, no matter how similar it may seem to you.
Therefore, if you follow any gambling attitude or process, it will ruin your trades as well as your career in the end.
Therefore, there is no scope for compulsive or emotional trading in this form.
This means that, sometimes you may need to minimize leverage or decrease the number of trades made in a specific period.
Most importantly, you should never trade with any amount that you cannot afford to lose – the most important principle for crypto trading in any form.
Two most important traits of responsible trading are:
- Letting the losses go by and
- Avoiding those tempting situations that promise lucky runs.
This will ensure that your losses do not stack up quickly, which will, in turn, protect your capital from damage.
And finally, do not think that you know enough about crypto futures trading at any point. Instead, you should keep on learning continuously.
Remember, crypto coins are a new asset class and these are evolving continuously.
Therefore, it is only with your continuous education that you will find this asset as well as the crypto market so exciting.
It is absolutely essential to know more about the blockchain industry as well as the ways in which you can improve your crypto futures trading skills.
Both these will help you to be successful and continue making profits by making more decisive results in the right time with proper and valuable insights.
You will be aware of the market movements in advance which will allow you to plan your moves depending on the future trends.
You will also know where and how exactly you can trade crypto futures by using a very low percentage of the notional amount as collateral as well as take positions to get maximum leverage at the same time.
With all this knowledge you will get higher flexibility to position your trade in the market and maintain a very low exchange risk at the same time.
Crypto futures trading is very capital efficient because it needs less money to participate in or to open your positions in comparison to spot trading or margin trading. However, for that you will need to know and follow the right technique.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.