Today I want to talk to you about a very interesting and complex topic: futures on Binance. If you are a small investor or a novice in the world of cryptocurrencies, this article is for you. We will break down what futures are, how they work, their advantages, disadvantages, and most importantly, the associated risks.

What are Futures on Binance?

Imagine that you and a friend want to bet on the future price of Bitcoin. You think the price will go up, and your friend thinks it will go down. Then, you make an agreement to see who is right on a future date. This agreement is what we call a futures contract.

On Binance, you can do this with many cryptocurrencies, not just Bitcoin. You can bet that the price will go up (long position) or that it will go down (short position). Additionally, you can use leverage, which is like borrowing money to make bigger bets than you could with your own money.

How Do Futures Work on Binance?

Betting up or down: You can bet that the price of a cryptocurrency will go up (long position) or that it will go down (short position).

Leverage: Binance allows you to use leverage to increase your bets. For example, if you have $10 and use 10x leverage, you can make a bet as if you had $100.

Liquidation date: In some futures contracts, there is a date when it is decided who won the bet. However, on Binance, there are also perpetual futures, which do not have an expiration date and can be held indefinitely.

Advantages of Futures

Possibility of large gains: If you make a good bet and use leverage, you can earn a lot of money with a small investment.

Winning in bear markets: You can make money even if the price of cryptocurrency goes down, as long as you bet correctly.

Disadvantages and Risks

Large losses: Just as you can earn a lot, you can also lose a lot, especially if you use leverage. If the market goes against you, you can lose more than you initially invested.

Complexity: Futures are more complicated than simply buying and selling cryptocurrencies. You need to understand how they work well to avoid costly mistakes.

Volatility: Cryptocurrencies are very volatile, which means their prices can change quickly and unpredictably. This increases the risk of losses.

Simple Example

Imagine that the price of Bitcoin today is $10,000. You believe that in a week it will rise to $12,000, so you buy a futures contract betting that it will go up. If you're right and the price rises to $12,000, you make money. But if it drops to $8,000, you lose money.

When Does the Bet Conclude?

In futures contracts, the bet is concluded at different times depending on the type of contract you are using:

Contracts with expiration date: These contracts have a specific date on which it is decided who won the bet.

Perpetual contracts: They do not have a fixed expiration date. You can keep your position open as long as you want, as long as you have enough margin to cover potential losses.

Manual closure: You can decide to close your position at any time before the expiration date (in contracts with expiration date) or at any time in perpetual contracts.

What Happens if the Direction of My Bet Goes the Opposite Way?

If the direction of your bet goes the opposite way, the higher the price goes, the more money you will lose. For example, if you bet $100 that the price of a coin currently costing $2 will drop to $1.90, but instead of dropping, the price rises to $2.10, $2.20, and then to $2.30, your losses will increase with each rise. You can close your position at any time to stop the losses, or use a stop-loss order to limit the losses.

Studies and Statistics on Success in Futures

Success in futures trading can vary widely and depends on many factors, such as the trader's experience, the strategies used, and market conditions. Some studies suggest that a large majority of futures traders, especially novices, tend to lose money. For example, a study by the Commodity Futures Trading Commission (CFTC) in the U.S. found that around 70-80% of futures traders lose money. Additionally, a report from the Financial Conduct Authority (FCA) in the UK indicated that between 70-80% of retail traders lose money on derivative products like futures.

Conclusion

Futures trading on Binance can be a powerful tool for making money, but it also carries significant risks. It is crucial that you educate yourself well and understand how futures work before investing. Use risk management strategies, such as using stop-loss orders, and maintain discipline to control your emotions. Remember, most novice traders tend to lose money, so proceed with caution and never invest more than you are willing to lose. Personally, I do not recommend this type of investment, but I felt obligated to explain it. My motto in exchanges is to not use leverage, but if you have money to lose and squander, go ahead, without fear of success!

Jorge Ferrer

Bachelor's degree in Business Administration