What is crypto futures trading?(For beginners how it works)

Cryptocurrencies can be traded in a variety of ways, but futures trading is one of the most popular and convenient. The following information will help you better understand futures trading. There are a number of ways in which it can provide better opportunities than spot trading and options trading. It is important to understand how to open long and short positions on different digital currencies. You can find all the information you need here. 

Cryptocurrencies are often traded by futures traders, who speculate on their future price without owning them. The cryptocurrency futures market allows traders to wager on the future price of digital currencies. The most common type of crypto futures contract at the moment is Bitcoin futures.

How Does Futures Trading Work?

You wouldn’t be able to distinguish cryptocurrency futures trading from regular trading if you watched the process on a cryptocurrency exchange platform like Bybit. Both long and short positions are opened in both cases, and proper risk management methods are used in both.

Unlike spot trading, futures contracts are not based on the assets themselves, but rather on their price action. It is much easier to handle and more fluid to trade futures without the actual asset. Furthermore, they provide high-leverage margin trading.

What Is Crypto Futures Trading?

In the mainstream markets, futures trading is similar to crypto futures trading. Using futures contracts, these agreements specify the price at which an asset can be purchased or sold in the future. When it comes to crypto, it means agreeing to buy a cryptocurrency at a certain price in the future, regardless of the price at that time.

Depending on the agreement, the time can range from 24 hours to several years. In futures trading, the parties involved speculate on how the asset price will perform in the future, so it is often referred to as gambling. The trade will take place at the agreed time and date, and only one person will benefit out of the two who agree on it. In addition to Kraken, BitMEX, Bybit, and eToro, which include several of the best crypto exchanges for US residents, users can also trade futures.

A crypto future is a type of crypto derivative. Trading platforms have been offering derivative contracts for nearly a century, but cryptocurrencies were only recently included. As with traditional derivatives, buyers and sellers enter into contracts to sell underlying assets. The value of derivatives is derived from the underlying asset and has no inherent value. The value of Ethereum, for instance, determines the value of an Ethereum derivative.

Newcomers flock to cryptocurrency exchanges as cryptocurrencies such as Bitcoin and Ethereum gain mainstream media attention. Crypto futures trading attracts risk-averse investors looking to profit from future market movements, while spot crypto trading attracts risk-averse investors looking to buy and hold digital assets for a long time. Crypto futures allow traders to maximize their profits when cryptocurrencies experience high levels of volatility.

How Crypto Futures Work – A Beginner’s Guide

Futures contracts involving cryptos are similar to futures contracts involving stock indexes or commodities. Trading futures isn’t limited to physical assets; financial assets can also be traded. Shares are bought and sold on a specific future date at a specific price in a futures contract. It is a true hedge investment to use futures to manage risk-reward. 

A cryptocurrency futures contract allows investors to speculate on the price of a cryptocurrency in the future without holding the underlying asset. Therefore, you don’t have to own cryptocurrency in order to gain exposure to the crypto world and possibly profit from price fluctuations. Investment portfolios also use futures to stabilize rate fluctuations. A crypto futures contract contains a cryptocurrency as the underlying asset, such as Bitcoin, Ethereum, Cardano, or Polkadot, which are particularly volatile cryptocurrencies.

CME, Bakkt, Bitfinex, and Binance are crypto futures exchanges that negotiate and trade these contracts. In crypto futures, speculators can “bet” on the price of Bitcoin based on a futures contract based on the price of Bitcoin.

What Are The Benefits of Investing In Crypto Futures?

If/when you plan on becoming a crypto futures trader, you need to know some of the stuff you need to know. To increase the potential gains on their futures bets, users can borrow capital from exchanges. Let’s get started. You can trade larger amounts with leverage by increasing your buying or selling power. A significant difference exists between platforms in terms of leverage rates.

On the spot market, for instance, you would need thousands of dollars to purchase 1 BTC. In contrast, you can open a long BTC position with a futures contract at a fraction of the cost thanks to leverage. The margin requirement is used to prevent traders from having their open positions liquidated. Initial margin is required when opening a futures position. In futures trading, collateral is the amount required to cover the notional value of a futures position.

Since crypto futures trading requires no assets to participate, it differs from spot trading in many ways. A single futures trade can easily multiply a portfolio’s value by multiple times. Crypto futures provide crypto miners with an opportunity to lock in prices that will guarantee a return on their mining investments regardless of where the price of the cryptocurrency is headed in the future.

In addition to hedge their position in the spot market, investors/traders use crypto futures. As a hedge, an investor may short bitcoin’s futures if he or she expects bitcoin’s spot price to rise. Therefore, even if bitcoin’s price moves in the opposite direction specified in their bet, they still stand to profit. The Commodity Exchange Act (CEA) considers virtual currencies like Bitcoin to be commodities. Commodity Futures Trading Commission (CFTC)-regulated exchanges trade Bitcoin futures contracts.

Markets for cryptocurrency futures emerged even as regulators struggled to determine the legal status of digital assets. Without authoritative regulations, BitMEX pioneered coin-margined and collateralized crypto futures trading. 

Traders may be prevented from trading on non-regulated venues in some countries due to such an environment. CFTC later pursued BitMEX for violations of the Anti-Money Laundering Law (AML) and the Bank Secrecy Act (BSA), and the founders pleaded guilty. This led to large institutional investors refraining from investing in crypto futures.

Such trading players may feel more comfortable with the presence of regulatory authorities like the CFTC. As the futures are settled in stablecoins, we don’t need bitcoin wallets because the futures are settled in stablecoins. Cryptocurrencies can be costly to keep in custody. 

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