It's no secret that the cryptocurrency market has evolved tremendously over the years, and with the rise in popularity of digital currencies, new financial tools have emerged. One of these tools is crypto futures.
This article will provide a comprehensive overview of crypto futures, including what they are, how they work and where to trade them. As a novice, common jargon such as "buy long," "sell short," and "derivative" can be intimidating. But fear not, by the end of this article, you will have a better understanding of crypto futures and how to trade them. So, let's get started!
Before we dive into crypto-specific futures, let's first understand the concept of futures in general. Futures are financial derivatives that allow traders to speculate on the future price of an asset. This could be anything from stocks, commodities, or in our case, cryptocurrencies.
A futures contract is a legally binding agreement between two parties to buy or sell an underlying asset at a predetermined price and date in the future. The buyer of the contract agrees to buy the asset at a set price, while the seller agrees to sell it at that same price when the contract expires.
Let's imagine the short story, Harry and Ron.
Harry believes that the price of Bitcoin will increase in the next month
On the other hand, Ron thinks that the price of Bitcoin will decrease in the next month.
Harry and Ron can make a futures contract between themselves to settle this disagreement. They agree on a price and date, and when the contract expires, they will see who was right. Now, let's say the price of Bitcoin did increase, as Harry predicted. Ron would have to buy Bitcoin from Harry at the agreed-upon price, even though the current market value may be higher. This results in Harry profiting from the futures contract, as he can sell at a higher price than market value.
In the early days of crypto, trading was mostly done through spot markets, where traders would buy and sell actual cryptocurrencies. However, with the introduction of futures into the market, traders gained the ability to speculate on the future price movements of cryptocurrencies without actually owning them.
The main difference between purchasing crypto outright and investing in crypto futures is that with futures, you don't own the underlying asset; you're simply speculating on its future value. With the example of Bitcoin futures, you are not buying the actual Bitcoin, but rather a contract that represents its price. This means that traders can profit from both an increase or decrease in the price of the underlying asset.
The benefits of this are two-fold. Firstly, it allows traders to hedge their positions and mitigate risk. Going back to the example of Harry and Ron, if they were actual crypto traders, both could invest in Bitcoin futures to protect themselves from potential losses if the price moves against their prediction.
The way this would work is that if Harry predicts an increase in Bitcoin's price, he can go long on a futures contract, while Ron, who believes the price will decrease, can go short. This way, even if one of them is wrong, the other can still profit from their position.
Long means buying a contract in the hopes of selling it at a higher price, while short means selling a contract with the intention of buying it back at a lower price. Long is optimistic about the potential increase. Short is pessimistic.
Now that you know more about what crypto futures are and their benefits, let's discuss how to actually trade them. The first step is to choose a cryptocurrency exchange that offers futures trading. We'll explore some specific options for you to try in the next section. But for now, know that not all exchanges offer futures trading, so be sure to do your research before signing up for one.
Once you've chosen an exchange, the next step is to open an account and deposit funds. Most exchanges require users to go through a verification process before they can start trading, so make sure to have all your necessary documents ready. After your account is set up and funded, you're ready to trade crypto futures!
Each dashboard may have their own nuances and terminology to navigate, but the basic steps for trading crypto futures are as follows:
Choose which cryptocurrency you want to trade a futures contract for.
Decide whether you want to go long or short on the contract.
Set a leverage amount, which is the amount you're willing to risk for potential gains. (leverage means you can borrow more funds than you have in your account to make a larger trade).
Set a stop-loss, which is the price at which you would like to exit the trade if it goes against your prediction.
Monitor the market and adjust your position accordingly, either by closing the trade at a profit or cutting your losses.
It's important to note that futures trading can be very volatile and risky, so it's crucial to have a solid understanding of the market and do thorough research before making any trades. This basic guide is just scratching the surface of crypto futures trading strategy and techniques, so it's important to continue educating yourself and seeking advice from experienced traders.
With cryptocurrency becoming more and more popular, the number of exchanges offering crypto futures trading has also increased. Below are some of the most cost-effective and user-friendly exchanges for trading crypto futures:
Coinbase
Crypto.com
Binance
Bybit
MEXC
OKX
Bitget
Bitfinex
Kraken
BitMEX
Deribit
Delta Exchange
Quick Tip: When selecting a platform, make sure to consider factors such as fees, security measures, and user-friendliness. It's also important to make sure the exchange is available in your region and offers the cryptocurrencies and futures contracts you are interested in trading.
Crypto futures trading can be a lucrative and exciting venture, but it's important to approach it with caution and a solid understanding of the market. Remember to always do your research, set clear strategies and risk management techniques, and never invest more than you're willing to lose.
With the right knowledge and approach, crypto futures trading can be a valuable tool for diversifying your portfolio and potentially increasing profits. So, keep learning and stay informed on the ever-changing world of crypto futures trading!
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