Definition of Futures Trading
Crypto Futures Trading for Beginners; is the transaction process of buying and selling where traders and investors execute a trade on an asset (currency or commodity) at a predetermined date and price in the future. The term “predetermined price” means that it is intended to determine the price of an asset as of a future expiration date, and these assets could be currency or commodities. Futures trading allows traders and investors to manage and speculate on the risks associated with the price fluctuations in the future of a currency or commodity. OTC (over-the-counter) or CME (Chicago Mercantile Exchange) is an organized exchange where future trading can be accomplished between two parties.
What are Crypto Futures?
Crypto futures trading and traditional futures trading are similar with a difference, namely, the difference between the assets. In traditional trading, assets are currencies or commodities; in crypto futures trading, assets are cryptocurrencies such as BTC and ETH. Crypto asset users can do future trading without having actual cryptocurrencies while predicting the price movement of cryptocurrencies. Several exchanges, like Binance (Binance Futures Trading), Coinbase, Kucoin, and Okex, allow users to trade futures with some specified leverage.
Risks Involved with Crypto Futures Trading for Beginners
Futures trading in cryptocurrencies is essential for crypto users because it is risky without learning and researching. Crypto users must do research before deciding to get involved in the futures market. The following risk factors are as follows:
Volatility
Price fluctuations are never predictable in cryptocurrencies; that’s why futures trading in crypto is considered very dangerous due to extreme price fluctuations, particularly for beginners.
Leverage
Investors and traders can use leverage while doing futures trading, which leads to control of a significant trading position while holding a small amount of money. However, trading with leverage is always risky because it can be done for either profit or loss.
Counterparty risk
Counterparty risk implies that sometimes, the other party will not be capable of accomplishing the current trade requirement, which is why one party may be at risk. Users can lessen their trading risk by using reliable crypto exchanges.
Regulatory risk
Cryptocurrencies have yet to be legalized in most countries worldwide, so crypto users always feel at risk when making investments or trading because governments can make decisions that are not favorable to crypto users.
Technical risk
Cryptocurrencies are involved in complicated infrastructure, and understanding crypto science is necessary for users to avoid hacks, technical glitches, and other crypto-related issues while doing future trading.
Benefits of Crypto Futures Trading
Users can take advantage of a new opportunity for trading and investing in the cryptocurrency market. However, risky crypto futures trading can be minimized with proper training and research. Along with possible risks, there are some benefits to crypto futures trading, and investors need to understand these benefits. Following are some of the benefits of crypto futures trading.
- Leverage Potential
- Reduced Volatility & Diversification Opportunities
- Increased Liquidity and Market Accessibility for Institutional Investors
Leverage potential
Experts Users have the potential for future trading but do not have enough money; for such users, crypto exchanges provide the facility of leverage, which could be 1X to 125X (125X = multiply original capital 125 times). If the trade is executed successfully according to users’ expectations, they can profit well.
Reduced volatility & diversification opportunities
When traders are interested in crypto futures trading, they can reduce their inquisitive approach toward price fluctuations in the cryptocurrency market. Further, users can diversify their approach toward new trading opportunities, which are constantly happening.
Increased liquidity and market accessibility for institutional investors
Institutional access to the cryptocurrency market has become more reliable for investors. Because the cryptocurrency futures market was previously unreliable, considered too risky, had glitches, and was too volatile. The increased liquidity of crypto futures trading has made it much easier for users to secure trade entry and exit points.
Types of Crypto Futures Contracts
Yes, there are two major types of crypto futures contracts, which are as follows:
- Standard Futures Contract
- Perpetual Futures Contract
Standard futures contract
A standard futures contract is a type of futures contract with a fixed expiration date. It is traded on an exchange, and the contract is settled on the expiration date. The contract specifies the price at which the underlying cryptocurrency will be bought or sold on expiration.
Perpetual futures contract
A futures contract with no expiration date is known as a perpetual futures contract. It is designed to track the price of the underlying cryptocurrency, and the contract is settled regularly, such as every 8 hours. Perpetual futures contracts are popular among traders who want to take advantage of short-term price movements in the cryptocurrency market.
How to Trade Crypto Futures Contracts
Before participating in this market, traders should conduct extensive studies and do comprehensive research to understand the hazards and earning opportunities of trading crypto futures. To make wise trading selections, traders must keep up with recent market news and trends. Investors can take the general actions listed below to trade cryptocurrency futures contracts:
- Calculating the Initial Margin Requirements and Position Size
- Placing an Order
- Managing Risk Exposure
Calculate the initial margin requirements and position size.
The first step is determining the initial margin required to enter into a futures contract. The initial margin is a percentage of the contract value the trader must deposit on the exchange before getting into a trade. The margin requirement varies depending on the exchange and the contract specifications. After calculating the initial margin requirement, the trader can determine the appropriate position size based on risk tolerance and available capital.
Place an order
Once the trader calculates the appropriate position size, they can order with exchanges such as Binance, Kucoin, Coinbase, and OKX. So, trades can be made through these platforms or a broker if the trade is not related to crypto. The order should specify the type of futures contract, the quantity, and the price at which the trader wants to enter the trade.
Manage risk exposure
After entering into a futures contract, it is crucial to manage risk exposure by setting stop-loss orders to restrict possible losses. Stop-loss orders are executed automatically when the underlying asset’s price reaches a certain level, helping to protect the trader from further losses. Traders can also use other risk management tools, such as trailing stops, to limit downside risk.
Top 5 Exchanges for Crypto Trading in Futures.
- Binance
- Coinbase
- OKX
- Kucoin
- Kraken
Conclusion:
Crypto futures trading for beginners can speculate on the price of cryptocurrencies by entering into contracts to purchase or sell them at a predetermined price at a specific time in the futures markets. Through futures trading, investors can profit from market price changes without possessing the underlying item that would likely generate a profit. The popularity of trading in cryptocurrency futures has considerably increased in recent years.
Crypto futures trading is now available on many platforms, and trade volume has dramatically increased. Trading cryptocurrency futures, however, can be dangerous due to the volatility and unpredictability of cryptocurrency prices. Investors should do their homework before investing in crypto futures and understand the risks. Trading in cryptocurrency futures is a complicated and developing sector with opportunities for investors and considerable hazards.
Trading in cryptocurrency futures is now possible on various platforms, and transaction volume has significantly increased. However, trading cryptocurrency futures can be risky due to the volatility and unpredictability of cryptocurrency prices. Investors should do their homework and comprehend the risks before investing in cryptocurrency futures. Futures trading in cryptocurrencies is a challenging and expanding market with many opportunities for investors and significant risks.
1. How do I start crypto futures trading?
Before entering the cryptocurrency market, prospective traders should follow this concise list of expert advice.
- Learn the exact fundamental science of crypto
- Identify the basic analysis
- Learn about the risk management
- Learn about the price fluctuations using charts and candles
- Study the project in which you are interested in investing.
- Join the Twitter page to keep up with the news.
- Be a part of the community.
- Learn about the exchanges and their rules and regulations.
Is futures trading profitable crypto?
Compared to spot trading, crypto futures trading offers access to leverage, which increases the possible profit from trades. But with spot trading, you can own your asset. In contrast, with futures, you only possess a contract produced from an underlying asset rather than your personal cryptocurrency, so it is profitable but risky.
What is the most profitable crypto trading strategy?
Arbitrage is one of the most popular market tactics. It entails purchasing a coin on one platform, leveraging the price differential between the two platforms, and selling it on another. Similar to scalping, arbitrage typically results in modest earnings. Therefore, you can earn more money by placing larger orders.
How long can you hold a futures contract crypto?
It depends on the perpetual or quarterly contracts, a trader can hold a perpetual futures contract forever because it never expires, and the quarterly futures contract expires in three months, so a trader should close their trade within the time limit of three months.