Traditional Futures vs. Crypto Futures - What Are The Similarities and Differences?
Futures contracts are legal agreements between parties to purchase or sell an asset at a later date.
Traditional futures trades are most often made by accredited investors who have substantial financial resources.
Crypto futures take place online on derivatives exchanges, openings the doors for many more investors to participate since they can now access the market from their phones.
When making investment decisions, it’s important to understand how money is changing and the options to keep your portfolio growing. A well-known trading technique, called futures trading, can be useful as it’s an option capable of keeping an entire portfolio afloat and even outperforming the markets in little time.
From the first recorded futures trade in 1710 to today’s modern environment, which includes stocks and cryptocurrencies, futures trading has soared in popularity. The trading fundamentals behind both markets offer very similar attributes to investors. But there are important differences between traditional and crypto futures contracts.
What Are Traditional Futures?
Before you begin, it’s important to know what a futures contract is. Futures contracts are legal agreements between parties to purchase or sell an asset at a later date. In essence, the initial investment is not necessarily purchasing the underlying asset but a contract representation of it. Traditional futures contracts focus on commodities such as crude oil and gold, or financial assets such as bonds and stocks.
The reason people participate in futures trading is that it offers the ability to add leverage to an investment. Leverage is the use of borrowed funds to multiply the return on an investment. Coupled with potential opportunity is the probability of deep liability, since leverage works in both directions.
Traditional futures trades are most often made by accredited investors who have substantial financial resources. Given the risk involved in futures trading, aspiring traders must be well-capitalized to avoid margin calls, which occurs when an investor is asked to meet the cost of maintenance margin in a losing position. If you can’t meet the margin, the broker would then initiate a force-close on your losing positions.
What Are Crypto Futures?
Crypto futures apply the same concept as traditional futures, but with the underlying assets being cryptocurrencies such as Bitcoin, Ethereum or BNB. Like traditional futures, crypto derivatives are contracts that include a predetermined long or short position in a crypto-asset.
Crypto futures take place online on crypto exchanges, opening the doors for many more investors to participate since they can access the market from their phones, rather than weaving their finances through various entities.
Another attribute that crypto exchanges, such as Binance Futures, offer is the ability to trade quarterly and perpetual contracts. These contracts work just as they sound with quarterly contracts expiring three months after being issued while perpetual contracts don’t have an expiry date.
Traditional traders and crypto traders alike enter a futures contract for two reasons: speculation and hedging.
No matter what a futures contract is based on, the market is responsive to speculation, or the ascription of a future value to an asset. Strong speculation gives investors a purpose for taking high-risk bets.
For example, Bitcoin maximalists, like MicroStrategy’s Michael Saylor, believe that BTC will be the most valuable asset of the 21st century, and therefore its value will continue to increase. These types of market participants might then enter a futures contract with a long position. If their forecast is correct, their position will pay off significantly as the value of Bitcoin appreciates over time.
In contrast to speculation, futures can be used to hedge against the underlying asset. If an investor believed Bitcoin had entered into a bear market, he or she might enter a futures contract to protect their portfolio from falling prices. Though the belief is that Bitcoin will ultimately grow in the long term, a bet can be placed against it to avoid short-term losses and to even make money while the asset falls.
Hedging works the same way in traditional markets. In fact, portfolios often hold hedged positions to cover for market failures, bubbles, unexpected events, and even large capitulations. Futures contract can act as an insurance coverage to maintain the finances of an investor.
When leverage is added to the mix, investors can hedge the full value of their portfolio if they truly believe the markets will fail.
Though traditional and crypto futures trades are used in similar circumstances, their respective market structures vary significantly.
A simple way to understand the difference between traditional and crypto markets is the regulatory framework behind them. Traditional markets have laws and standards that are designed to ensure the legitimacy of an exchange, protecting against fraudulent behavior, market abuse, and so on. This means that every exchange must be approved, slowing trade processes.
Crypto markets are generally unregulated and don’t secure regulatory approval for trades. Trading happens faster on a crypto exchange, and new options begin to arise. Unregulated markets allow for perpetual swaps, which are futures contracts without an expiration date. Since crypto exchanges operate around the clock, investors can capitalize on market changes at any time.
One of the most obvious differences between the two markets is the time window when you’re able to trade futures contracts. The stock markets, for instance, are closed for 13.5 hours each day, making it impossible to trade assets or change positions should major external events occur. With other assets like gold or oil investors still need to work with others to secure their futures contracts.
With crypto-assets, trading is possible at any time of day, any day of the year. Markets never get shut down and are active all around the globe, all the time. This is a massive advantage for traders who are in tune with crypto asset performance and gives insight to when crypto-assets perform better or worse depending on the time of day/year.
As alluded to earlier, a major difference between traditional and crypto futures exchanges is the size of these markets. In terms of value, traditional markets are much larger than crypto exchanges. The top two largest exchanges, CME and ICE, are both worth tens to hundreds of billions of dollars. Institutional investors, corporations, and private investors participate in these exchanges daily.
In contrast, crypto futures markets see a relatively smaller institutional participation and are primarily dominated by retail investors. However, as cryptocurrencies like Bitcoin, Ethereum and BNB enter the mainstream market, more institutional investors are starting to recognize cryptocurrencies as an alternative asset class. Even institutional investors such as BlackRock, which has authorized two of its funds to invest in Bitcoin futures, are beginning to participate in the crypto futures markets.
No matter which market you trade, it’s important to first understand the stand-alone value of whatever you want to invest in, as well as its market cycles. Over-leveraged markets can burn investors and liquidate them quickly. But used wisely, and with a well-planned strategy, any futures trade can reap significant rewards.
Traditional exchanges are protected by gatekeepers, financial requirements, and locality. They are also slower and indirect to the investor.
On the other hand, Crypto exchanges only require an internet connection, accept anyone willing to play, and are based on peer-to-peer transactions. There is no intermediary between an investor and the exchange. Crypto markets are known for being more volatile, though, and often have huge amounts of liquidity in them.
No matter where you decide to trade, be wise and good luck!
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Disclaimer: Crypto assets are volatile products with a high risk of losing money quickly. Prices can fluctuate significantly on any given day. Due to these price fluctuations, your holdings may significantly increase or decrease in value at any given moment, which can result in a loss of all the capital you have invested in a transaction.
Therefore, you should not trade or invest money you cannot afford to lose. It is crucial that you fully understand the risks involved before deciding to trade with us in light of your financial resources, level of experience, and risk appetite. If required, you should seek advice from an independent financial advisor. The actual returns and losses experienced by you will vary depending on many factors, including, but not limited to, market behavior, market movement, and your trade size. Past performance is not a guide to future performance. The value of your investments may go up or down. Leard more here.