Cryptocurrencies are gradually integrating into the real economy and the crypto market is acquiring more and more common features with the markets of traditional assets.
At the end of 2017, futures trading became available on the cryptocurrency market.
What Are Cryptocurrency Futures
Cryptocurrency futures give traders access to digital assets without the need to actually own coins.
This is reminiscent of futures contracts for commodities or stock indices, where the investor assumes the risks of the value of the cryptocurrency. You may want to check the difference between alpha and beta and how it can help in making investing decisions.
In accordance with the agreement, the trader does not trade in BTC to LTC or other coins but uses cash.
A trading contract represents a value equivalent to a specific cryptocurrency.
The main advantage of trading cryptocurrency futures is the ability to protect your funds from the extreme volatility that is common to all popular cryptocurrencies.
How Cryptocurrency Futures Work
The cryptocurrency market has some specific features that make trading difficult. In particular, these are extreme simultaneous volatility, an uncertain legal status, and a negative image in many states.
Using futures, you limit your risks solely to changes in the price of the cryptocurrency and do not actually own it.
An important element of trading is leverage. It helps to make money trading futures and is one of the key arguments in favor of starting it.
Using leverage, a trader can buy a digital asset, actually investing only a fraction of its market value.
Basic Concepts Of The Cryptocurrency Futures Market
Before you start trading cryptocurrency futures, you need to study the basics of the market, including the mechanisms for influencing transactions.
Learning the basic concepts of the market is your first step towards expert-level professionalism.
Leverage
The attractiveness of the futures market is largely due to the availability of leverage.
Leverage makes it possible to use capital as efficiently as possible. To buy 1 BTC on the spot market, you will need a large amount ($30,000 at the time of writing).
Using a leveraged futures contract, you can open a BTC position by paying only a fraction of its value.
The greater the leverage, the smaller part of the cost you invest in opening a position. Spot trading does not use leverage.
If you have $1,000 in your account, you can only buy a portion of the coin for $1,000.
Initial And Maintenance Margin
To open a position in the market, you need an initial margin. This means that you will need margin to open another position.
The maintenance margin is the minimum amount that an investor needs to hold an open trading position.
The maintenance margin is constantly monitored to account for the use of collateral. if the trader runs out of the maintenance margin limit, the position is automatically liquidated.
Funding rate
For regular convergence of index and futures prices, exchanges use the funding rate mechanism.
Funding rates are calculated based on the price difference between the spot and futures markets. As a result, investors receive payments or pay for financing, depending on open positions.
It also happens in the market that the funding rate rises sharply and then some positions become unprofitable for traders.
Pros And Cons Of Futures Trading
Any undertaking has its strengths and not always obvious disadvantages. And before making money trading futures, it is important to know about them.
Pros
- Futures trading makes it possible to play against the market and make a profit both when an asset rises and falls.
- Futures trading involves the use of leverage.
- Futures are a good tool for hedging an investment portfolio.
Minuses
- It is impossible to completely eliminate the impact of extremely high market volatility.
- Leverage helps to increase profits, but at the same time, risks increase proportionally.
