Cryptocurrency Futures Trading: A Complete Beginner's Guide

What Is Futures Trading? 

Beginner traders often face the choice of whether it is better to trade on the spot market or the futures market. Without a detailed understanding of each option, you can make many mistakes and incur losses.

Simply put, futures trading is an opportunity to make money on crypto or other commodities without owning them. Instead of buying and selling assets, the investor interacts with contracts (futures) that give the right to make a transaction with them at a certain time at a fixed price.

The above definition answers the question, “What is the difference between futures trading and spot trading?” On the spot, investors directly buy an asset, fully redeeming its value, and immediately become its owner. This type of trading is considered simpler and safer.

Additionally, we explain what futures are. They are agreements for the execution of a transaction in which its conditions are clearly specified: the name of the asset, the type of operation, the volume, the price, and the date of execution. Contracts are considered derivative financial instruments that can be purchased on exchanges. 

To purchase futures, you do not have to pay the entire cost of the commodity; you only need to pay part of it — the margin. It is a security deposit required by platforms to open and hold positions. Accordingly, there is a difference between the initial and maintenance margins. Its size may vary depending on the volatility and conditions of trading platforms. 

How Does Cryptocurrency Futures Trading Work? 

Every investor can earn income on fluctuations in the value of digital assets. 

Cryptocurrency futures trading is based on the same principles as in other areas: 

• Fixed rate; 
• Leveraged margin trading; 
• Earning on price differences. 

Leverage is a mechanism that allows a trader to open positions for an amount that exceeds their capital.  

Example: 

Suggest that the current price of ETH is $1,800. You expect it to rise to $2,000 in a week and buy a futures contract for 1 ETH with a fixed rate of $1,800 and a maturity date in 7 days. Using 10x leverage, you can deposit 10% of the contract value — $180.

A week later, ETH rises to $2,000, but you have a contract that allows you to buy it for $1,800. You sell the futures at the market rate to another trader and make $200 on the difference. However, if the price drops to $1,600, you will realize a loss of $200.  

You can trade without leverage, but in this case, you need to cover the cost of the contract with your funds. If the ETH rate is within $2,000, you will have to deposit the entire amount. 

Basics of Futures Contracts 

Let’s take a look at the key features of cryptocurrency futures agreements: 

• Each contract is linked to a specific token or coin, such as Ethereum. The futures price is determined by the value of that asset in the market. 
• The agreements have a fixed volume. For example, the standard Bitcoin contract volume might be 5 BTC. 
• The contracts prescribe the expiration date, which is most often set for the end of the month. At this point, the settlement is carried out. 

Types of Cryptocurrency Futures 

Having clarified what futures trading is, let’s consider the types of agreements available to traders. 

Standard futures contracts 

These agreements have a fixed execution date. They are divided into two subtypes: 

• Deliverable futures. These are contracts that involve the actual transfer of the underlying asset to the buyer. For example, if you enter into a deliverable agreement for 1 BTC at a price of $90,000, you will receive the coin exactly at that rate on the day of execution, regardless of its market value. Such contracts are useful for those interested in actually owning the asset. 
• Settlement futures. In this case, the underlying asset is not transferred. Instead, the difference between the value of the agreement and the market rate of the cryptocurrency at the time of execution is calculated, which is the earnings. For example, you buy a futures contract for 1 BTC at $90,000. A month later, the price increases to $97,000. On the day of execution, you get the difference of $7,000. However, if the price falls, you will suffer losses. 

Perpetual Futures Contracts 

These agreements are unique in that they have no expiration date. You can keep the position open for as long as you like, but this approach comes with a funding rate. These are regular payments between traders with long and short positions. The former are oriented to price growth, and the latter — to fall.

Payments are calculated every 8 hours based on the difference between the contract value and the spot price of the cryptocurrency. Traders with long positions pay those holding short positions if the market is bullish and vice versa if the market is bearish.

Example: 

You believe Bitcoin will fall and open a short position of 1 BTC, while another trader opens a long position because they are confident of growth. After recalculating the difference, you will either receive or pay a certain amount to your opponent, depending on the change in the value of BTC. 

Advantages of Futures Trading 

Trading using contracts is beneficial for the participants and the market as a whole: 

Risk Management 

Futures allow you to minimize losses thanks to appropriate tools and strategies:

• Stop-losses — automatic orders that independently close losing positions when the cryptocurrency reaches a given value. 
• Diversification — distribution of funds between different coins and tokens. 
• Leverage control — careful use of leverage to reduce losses. 

Price determination 

Futures trading is crucial in establishing a fair market value for cryptocurrencies. By working with contracts, traders appear to indicate what they expect future prices to be. This creates a certain consensus that demonstrates the general sentiment in the market. Also, the pricing process in the futures market accounts for the current balance between supply and demand.

Increasing market liquidity 

Liquidity is the ability to easily buy or sell assets without significantly affecting their value. The higher it is, the easier it is for traders to enter and exit positions.

Futures contribute to: 

• reducing volatility through greater transaction volume; 
• attracting institutional investors who bring additional funds and expertise to the market; 
• increased market stability due to a larger number of participants. 

For example, the introduction of Bitcoin contracts was an important step to attract large players, such as investment funds, which positively impacted the entire industry.

Risks of Cryptocurrency Futures Trading 

Understanding the issues and challenges helps traders avoid serious losses and develop effective strategies. Let’s take a look at the key risks: 

Margin requirements 

If the account balance falls below a set maintenance margin level due to losses, the position is liquidated. There are venues that have contribution requirements as high as 100% and force traders to cover the full cost of contracts.

Failure to maintain margin levels on time can lead to losses, especially when using leverage. 

Market volatility 

Fluctuations in cryptocurrency rates can be sharp and unpredictable. High volatility can lead to position management errors and financial losses. 

Regulatory concerns 

Decisions by authorities can affect the availability of exchanges, price stability, and overall trading volume. A sudden ban on a certain type of contract or stricter platform requirements can make trading more difficult. 

Cryptocurrency Futures Trading Strategies 

Let’s see how to trade futures profitably using popular strategies: 

Hedging 

It is a risk management technique that helps protect investments from unfavorable price movements. 

Example:

You have 1 BTC, but you are concerned that its value will drop. To re-insure yourself, you can open a short position in the futures market. If Bitcoin does fall in value, the losses on the spot will be offset by the gains from the futures.

It is important to realize that hedging is a good way to protect capital, but it does not offer the opportunity to capitalize on rising prices. 

Speculation

A trader predicts changes in cryptocurrency rates and profits from it. Using futures contracts, they can open positions in anticipation of a rise or fall in the asset’s value.

Example: 

If you expect Ethereum to rise, you can open a long position (buy a contract). If your predictions come true, the difference in value will become your income.  

Leverage is highly common in speculation. 

Arbitrage

Participants who follow this strategy compare the value of the same asset on different trading platforms.

Example: 

The BTC rate on one exchange is $90,800, and on another, it is $91,000. You can buy the coin on the first platform and sell it on the second, making a profit.

Success requires instant reaction and accurate calculation of costs (commissions and transfer speed). 

How to Trade Cryptocurrency Futures? 

Working with contracts requires knowledge and discipline. We suggest key steps: 

1. Understand how futures agreements work, margin trading, and how leverage works. 
2. Choose your futures trading style: short-term speculation, long-term investing, or hedging. Adapt the strategy to your goals and risk level. 
3. Create a trading plan, including entry and exit conditions, position size, and the use of stop-losses. 
4. Determine how much you are willing to lose on each trade. Keep records of your trades to improve your strategy. 
5. Use only free funds, not money for day-to-day expenses. Set realistic goals and avoid a gambling approach. 

Conclusion 

Cryptocurrency futures trading offers traders many opportunities but requires a deep understanding of market mechanisms, a sound strategy, and risk management. Constant training, discipline, and analyzing your actions will help you achieve success and feel confident in the market. 

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