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Crypto Futures Trading: Things You Need to Know Before You Begin

2021-06-01

Key Takeaways:

  • Futures contracts allows traders to gain exposure to cryptocurrencies without the need to possess the underlying asset.

  • Traders can sell high and buy low to profit from the price difference, which is known as short selling.

  • Leverage draws traders to the futures market, making it extremely capital-efficient. 

Derivative contracts have been in existence for almost a century, but it wasn't long ago when trading platforms started adding cryptocurrencies to their offerings. Digital assets now take a significant part of the portfolio of the average investor and their volatility makes them an excellent financial product for futures trading.

Other than being one of the most traded crypto derivatives products, futures embody many long-established derivatives. Often, people confuse futures with options but these instruments are quite opposite from each other, offering different benefits.

What Are Crypto Futures?

Futures contracts like USDT-margined futures allow traders to gain exposure to cryptocurrencies without the need to possess the underlying asset. It is a similar concept to stock indices or derivatives contracts involving commodities, where an investor can take risks on an asset’s future value. Therefore, the value of a crypto futures contract derives from the digital asset it represents,  such as Bitcoin or Ethereum. 

When a crypto futures contract expires, the trade is settled in cash rather than the actual digital asset.

The dominant aspect of crypto futures trading is that it can protect investors against adverse market conditions. Traders can sell high and buy low to profit from the price difference, which is known as short selling. Essentially, crypto futures contracts give market participants the opportunity to make profits regardless of the price direction of the underlying asset.

Crypto futures contracts are tradeable 24/7 on derivative trading platforms like Binance Futures. Due to the high volatility associated with derivatives trading, traders must manage risks prudently, and it’s imperative to learn the fundamental basics of crypto futures before investing.

How Do Crypto Futures Work?

While digital assets are met with diverse and unique challenges, from high volatility to negative publicity, some traders use this volatility to their advantage.

The most vital thing to note in crypto futures trading is that you only take risks on the price changes without holding the actual cryptocurrency.

Let’s consider a simplified example! 

John entered a long futures position when BTC was trading at $40,000 while Sarah entered a short position at the same time. Then, prices moved up and John and Sarah decided to settle their positions at $45,000. In this case, Sarah, who is holding a losing trade, will have to pay the exchange the deficit loss of $5,000 ($45,000-$40,000 = $5,000). John, on the other hand, will receive a profit of $5,000 from the exchange.

Basic Concepts of Crypto Futures Trading

Traders tend to familiarize themselves with the essential concepts that are involved in crypto derivatives to have a better understanding of the benefits these financial products have to offer. 

Here are a few terminologies that can get you closer to becoming a successful crypto derivatives trader. 

1. Leverage

The lure of leverage draws traders to the futures market, making it extremely capital-efficient. 

For example, to buy 1 BTC on the spot market, you'd need thousands of dollars. But with a futures contract, you can open a long BTC position at a fraction of the cost thanks to leverage. 

In contrast, leverage is not available in spot trading so if you only have 100 BUSD in your spot wallet,  you can only afford 100 BUSD worth of Bitcoin.

2. Margin Requirements

An initial margin is needed to enter into a futures position. It is the percentage of a futures position’s notional value that must be covered by BUSD or another collateral when using a futures trading account. 

On the other hand, maintenance margin refers to the minimum amount that investors need to keep trading position(s) open. Maintenance margin checks are continuous and help in margin utilization calculation. 

When a trader's maintenance margin limit is hit, the open position gets liquidated.

3. Funding Rates

Crypto perpetual contracts don't settle like traditional futures contracts. Therefore, exchanges require a system that ensures that the index prices and futures prices converge regularly, which is called the funding rate. 

Funding rates are calculated based on the price difference between spot and futures markets. Investors will pay or receive funding payments relative to the open market positions, which can have adverse effects.

For instance, funding rates may surge in an overheated bull market, making it costly for traders to hold long positions.

Pros & Cons of Trading Futures

Lucrative endeavors such as futures trading come with their fair share of advantages and disadvantages. Herein are the pros and cons of trading these crypto derivatives.

Pros

  • Crypto futures trading allows you to bet against the market. You can go long or short to profit from either direction of the market. 

  • With the use of leverage, traders can gain significant exposure to an asset with only a fraction of its total cost. 

  • Many traders use futures trading as a hedge against spot markets, which is great for any investment portfolio.

Cons

  • The high volatility in the cryptocurrency markets can be a blessing or a torment to traders because the direction of an asset is not guaranteed.

  • The exposure to leverage can lead to significant losses, especially for novice traders who do not implement a solid risk management strategy.

How to Trade Futures Contracts on Binance?

Trading crypto derivatives contracts on Binance Futures is pretty straightforward. If you are an existing user, you can get started by following these steps: 

  1. Open a futures trading account on Binance Futures. Please note that you must enable 2FA verification to fund your futures account before you start trading.

  2. Deposit funds to your futures wallet, such as USDT, BUSD, or any other cryptocurrencies supported by Binance Futures. 

  3. Select between the two derivative contracts available on Binance Futures: USDⓈ-M Futures and COIN-M Futures. 

  4. Select the appropriate amount of leverage for your position.

  5. Place buy-limit, buy-market, or any other type of orders available on Binance Futures. 

Conclusion

Crypto derivatives trading is a convenient way to speculate on the future valuation of digital assets. It can be lucrative for those with the proper knowledge and a solid risk management strategy. 

Binance Futures has grown to become the most liquid derivatives exchange in the market. It provides users with the tightest bid/offer spread to help them avoid unnecessary risks. The vast selection of trading pairs and enormous trading volumes make Binance Futures the preferred crypto derivatives exchange for more than 28.6 million active traders. 

Even inexperienced traders are taking advance of Binance Futures to sharpen their skills. It offers a dedicated mock trading environment for users to learn how to trade at their own pace with zero risks. Anyone can practice in real-time trading live cryptocurrency markets without losing any capital. 

So if you haven’t done so yet, sign up for Binance Futures today and explore the world of crypto derivative contracts!

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