There are two main types of cryptocurrency trading: spot trading and futures and futures trading. The difference is that spot trading involves buying and selling the underlying asset itself, while futures trading is basically about the right to get the underlying asset at a later date at a predetermined price. This means that the investor who buys a futures contract seeks to make a profit through the increase in the price of the underlying asset. In this article, we will introduce you to this type of trading, as well as its advantages and disadvantages.
1) What is cryptocurrency futures trading?
Futures trading involves buying and selling futures contracts. This contract is an agreement between buyer and seller for future delivery of the purchased item on a predetermined date and at an agreed price or payment to the buyer of a sum of money equal to the price of the effective future contract on the expiration date. On this date, the buyer is free to sell his contract to another person, even before settlement. The price of futures contracts is almost the same as the price of their underlying assets. On the other hand, it can deviate from the price of the underlying asset, especially during periods of sharp rises or falls in the markets. Thus, during bullish periods, futures contracts tend to be more expensive than their underlying assets; conversely, in periods of decline they are generally cheaper.
Each futures contract has several parameters:
- Contract price – sum of money paid by the buyer to the seller for the contract;
- Duration of the contract – when the physical delivery or crediting of money to the holder of the contract is due;
- Expiry date – for fixed futures contracts, this is the date the contract holder receives their asset or the amount of money based on the contract price prevailing on that date.
In addition to time-limited contracts, there are also so-called perpetual contracts. They do not provide an expiration date ie. the contract holder can keep them for as long as he wishes. Some cryptocurrency exchanges offer such contracts.
Depending on the type of delivery, contracts can be categorized into deliverable and non-deliverable contracts. The latter suggests cash settlement (ie settlement in monetary form and not in the form of the underlying asset).
2) How does futures trading differ from other financial instruments?
The main difference between traditional (spot) trading and futures trading is that in trading contracts the market participants do not obtain the underlying assets (ie cryptocurrencies) and only receive the right to obtain them in the future. By trading futures before settlement, the investor hopes that the price of the contract will rise in the future, allowing him to sell it at a profit.
Another significant difference is that the liquidity of the futures market is much greater than the spot markets, which makes it possible to open positions on a larger scale with minimal impact on the price.
3) What are the benefits of crypto futures?
Cryptocurrency futures trading has obvious advantages over spot trading:
- Higher liquidity than on the spot market. High liquidity makes it easy to open large volume positions without affecting the price of the asset. The fact is that large positions affect the price of the underlying cryptocurrency: they make it go down or up, so that the trade is executed at a less favorable price for the trader than he wants. This does not happen in the futures market.
- A large number of assets for trading. For example, the Bitget exchange offers to trade dozens of futures contracts, depending on the trader’s preference.
- An option to use margin trading which allows traders to earn more with their money. Many crypto exchanges offer margin trading, including Bitget, which has several cryptocurrency pairs for this.
- An opportunity to open long and short positions to take advantage of the bull and bear markets.
4) What are the most common risks associated with cryptocurrency futures?
Besides the advantages, trading crypto futures also has disadvantages.
- First of all, margin trading can result in significant losses, so the trader must be careful.
- Second, a futures trader does not get the asset into their account, so there is a risk of fraudulent activity from dishonest crypto exchanges.
5) Are cryptocurrency futures legal in the DACH zone?
Yes, cryptocurrency futures are permitted by law in the DACH countries, namely Austria, Switzerland and Germany. Financial regulatory authorities in these countries oversee cryptocurrency companies and exchanges, and the latter are required to obtain a license to offer cryptocurrency market services to their users. DACH countries have the following regulators:
- Austria – Financial Markets Authority (FinanzmarktaufsichtFMA);
- Switzerland – Swiss Financial Market Supervisory Authority (FINMA);
- Germany – Federal Financial Supervisory Authority, or BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht).
6) Where can I trade cryptocurrency futures?
Cryptocurrency futures trading is offered by many exchanges, including Bitget, Binance, CME (Chicago Mercantile Exchange), FTX, OKX and others. On Bitget, you can find dozens of cryptocurrency futures to trade, including the most popular pairs such as BTCUSDT, ETHUSDT, as well as less popular pairs. Bitget’s futures trading uses a funding rate mechanism, which is an accumulation or debit to the trader’s account of an amount equal to the difference between the predetermined price and the spot price of the asset. , based on the current contract price.
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