Futures contracts, such as USDT-margined futures, enable traders to gain exposure to cryptocurrencies without owning the underlying asset. It is similar to stock indices or commodity derivatives contracts in that an investor can take risks on the future value of an asset. As a result, the value of a crypto futures contract is determined by the digital asset it represents, such as Bitcoin or Ethereum.
The most important aspect of trading crypto futures is that it can protect investors from adverse market conditions. Short selling is when a trader sells high and buys low in order to profit from the price difference. Essentially, crypto futures contracts allow market participants to profit regardless of the underlying asset's price movement.
Because of the high volatility associated with derivatives trading, traders must manage risks prudently, and it is critical to understand the fundamentals of crypto futures before investing.
How Do Crypto Futures Work?
While digital assets face a variety of unique challenges, such as high volatility and negative publicity, some traders use this volatility to their advantage.
The most important thing to remember about crypto futures trading is that you only take risks on price changes rather than holding actual cryptocurrency.
Consider this simplified example!
When BTC was trading at $40,000, John opened a long futures position, while Sarah opened a short position. After that, prices increased, and John and Sarah made the choice to settle at $45,000. In this scenario, Sarah will be required to cover the exchange's $5,000 deficit loss ($45,000 – $40,000 = $5,000) as she is holding a losing trade. In contrast, John will profit $5,000 from the exchange.
Basic Concepts of Crypto Futures Trading
Traders tend to become acquainted with the key concepts involved in crypto derivatives in order to gain a better understanding of the benefits these financial products have to offer.
Here are a few terms that will help you become a successful crypto derivatives trader.
Leverage
Trading in futures is extremely capital-efficient because of the allure of leverage.
To buy 1 BTC on the spot market, for example, you'd need thousands of dollars. However, thanks to leverage, you can open a long BTC position with a futures contract at a fraction of the cost.
Spot trading, on the other hand, does not allow for leverage, so if you only have 100 USDT in your spot wallet, you can only afford 100 USDT worth of Bitcoin.
Margin Requirements
To open a futures position, an initial margin is required. When using a futures trading account, it is the percentage of a futures position's notional value that must be covered by USDT or another collateral.
Maintenance margin, on the other hand, refers to the minimum amount required by investors to keep their trading position(s) open. Maintenance margin checks are ongoing and aid in the calculation of margin utilization.
When a trader's maintenance margin limit is reached, the open position is closed.
Funding Rates
Crypto perpetual contracts do not settle in the same way that traditional futures contracts do. As a result, exchanges require a system that ensures that index prices and futures prices converge on a regular basis, known as the funding rate.
The price difference between the spot and futures markets is used to calculate funding rates. Investors will pay or receive funding payments in relation to open market positions, which may have negative consequences.
In an overheated bull market, for example, funding rates may rise, making it more expensive for traders to hold long positions.
Pros & Cons of Trading Futures
Lucrative endeavors such as futures trading have both advantages and disadvantages. Herein are the pros and cons of trading these crypto derivatives.
Pros
Trading crypto futures allows you to bet against the market. To profit from either direction of the market, you can go long or short.
Traders can gain significant exposure to an asset by using leverage at a fraction of its total cost.
Futures trading is frequently used as a hedge against spot markets, which is beneficial to any investment portfolio.
Cons
Because the direction of an asset is not guaranteed, the high volatility in cryptocurrency markets can be a blessing or a curse for traders.
Leverage exposure has the potential to cause big losses, especially for novice traders without a solid risk management strategy.
Conclusion
Trading crypto derivatives is a convenient way to speculate on the future value of digital assets. It can be profitable for those who have the necessary knowledge and a solid risk management strategy.