How to trade futures? Bitcoin futures contracts are a derivative product similar to traditional futures contracts. Two parties agree to buy or sell fixed amounts of bitcoin for a specific price on a certain date. Traders use them speculatively, but you can also use them to hedge. Hedging is especially popular with miners who need to cover their operating costs.
Bitcoin futures contracts are an alternative investment opportunity to simply HODLing coins and tokens. As a more complex product, they require a deeper understanding to trade safely and responsibly. While they are more difficult to use, futures provide ways to lock in prices with hedging and profit from downturns in the market with shorting.
What are futures?
You can agree to buy or sell a fixed amount of BTC for a specific price (the forward price) on a certain date. If you go long (agree to purchase) on a Bitcoin futures contract and the mark price is above the forward price on the expiration date, you will profit. The mark price is an estimated fair value of an asset derived from its spot price and other variables.
If the mark price is below the forward price at expiration, you will lose money and the short position profits. A short position occurs when a trader sells an asset they’ve borrowed or own while expecting the price to drop. The trader then purchases the asset at a later date to make a profit.
In essence, trading futures require speculation. Long and short positions allow you to bet on the state of the market. In a bear market, it’s possible to still make money by taking a short position. There are also multiple possibilities for arbitrage as well as sophisticated trading strategies.
How to trade futures?
Trading futures can be done in many well-known cryptocurrency exchanges such as Binance.
Not every futures contract is the same. Different exchanges have varying mechanisms, expirations, pricing, and fees on their futures products. Do find out which exchange suits your needs the most.
Benefits of futures
Similar to traditional finance, trading futures can give you profits by hedging. This is to mitigate potential losses for an existing trade in the event that it moves in the opposite direction than what you want it to.
For example, a Bitcoin miner can take a short position in a futures contract to protect their BTC holdings. When the futures contract matures, the miner will have to settle with the other party in the agreement. If the price of Bitcoin in the futures market (mark price) is higher than the contract’s forward price, the miner will have to pay the difference to the other party. If the mark price is lower than the contract’s forward price, the other party taking the long position will pay the difference to the miner.
Additionally, an enticing feature for investors to trade futures is trading on margin, which allows traders to borrow funds and enter bigger positions than you would initially afford. This would mean that you can maximise your profits, but at the same time potentially amplify your losses.
In Conclusion
How to trade futures? Many well-known crypto exchanges have provided the future trading options for many interested traders who are ready to diversify their portfolio and make profits. However, trading futures do involve high financial risks, so it is advisable that you understand the working mechanisms of futures trading first.
