Crypto traders use different methods to trade cryptocurrencies, and not all may be suitable for everyone. While some methods are pretty popular as nearly every crypto investor uses them, others, like futures trading, are not very common. Today's topic is "What Is Futures Trading In Crypto? And What Are The Risks of Futures Trading?"
What Is Futures Trading In Crypto?
A futures contract in cryptocurrency means an agreement to buy a specified cryptocurrency at a specified price at a future date. Agreed times can range from as short as 24 hours to several years.
This is often referred to as gambling and the term futures trading is used because the parties involved in the transaction typically base their trades on speculation about how asset prices will behave in the future.
No matter what happens, the deal will be executed at the agreed date and time, and usually, only one of the two who agreed to the deal will benefit. Exchanges, where users can trade futures, include Kraken, BitMEX, Bybit, and eToro , some of which are top cryptocurrency exchanges for US residents.
How does crypto futures trading work?
Futures traders are usually just speculating about how the price of crypto assets might move in the future. Their conclusions are based on predictions that an asset will perform in a certain way on a certain day, which may be based on fundamental or technical analysis using some metrics, or sometimes both.
For example, a trader can open his position short futures on a contract to sell Bitcoin at a certain price on October 23, 2022. Anyone who wants to enter the trade opens a long position on the contract. Assuming the agreed-upon price is $30,000 per bitcoin, and the current price is $23,000, the seller will be selling at a profit if the price of bitcoin stays under $30,000 while the buyer will be losing.
On the other hand, if the price reaches $45,000 on 23 October, they will be at a loss, and the buyer in a profit. Futures contracts can only be canceled before the agreed date by entering the opposite trade to the one you initially opened. The contract must be fulfilled once the agreed day is reached.
To increase their potential gains, futures traders sometimes borrow funds from the exchanges they trade to increase the size of their trades. This is called leverage and is a multiple of your original trade size. H. For trade X, the leverage can be 10x, 20x, 50x, or even 100x depending on the exchange. Be aware that borrowing to expand a deal can be counterproductive if the deal is not in your favor. They will be liquidated and your funds will be lost forever, so it's a pretty risky adventure.
What are the risks of futures trading?
Futures trading can be lucrative if done correctly, but it also carries significant risks. Using leverage, for example, not only increases your potential gains but also increases your potential losses, which is a significant risk.
This is even more acute in a highly volatile crypto market. Before an exchange lends money to use leverage in futures trading, it must set aside an amount called initial margin as insurance against losing trades. It is held by the exchange and can only be accessed after winning trade and paying back the borrowed funds.
If you lose a trade, the exchange will automatically liquidate your position and close the trade. As a result, the capital deposited as an initial margin will be irrevocably lost. This is why leverage trading is not advisable for inexperienced traders.
This "What Is Futures Trading In Crypto? And What Are The Risks of Futures Trading?" article is not financial advice. If you're interested in any form of investment, you should approach a licensed financial adviser who can give you the best advice based on your needs and risk appetite.
