Why do people trade crypto futures?
Why do people trade crypto futures?
Crypto futures can help hedge against downside risks when implementing a long-term strategy. They can also be used to take advantage of temporary opportunities during short-term periods of market volatility. Many use futures in conjunction with other types of trading orders to maximize their gains or minimize their losses when trading.
While futures were once an investment vehicle available only to institutional investors, they are now an accessible trading option for crypto traders as well. However, understanding how and when to use these products can be difficult for some.
For those who have not researched crypto futures contracts, they can seem complex and daunting to trade. Advanced trading strategies often use multiple futures positions across a number of different price levels — which can be difficult for new investors to manage.
Understanding how to properly manage risk and reward with futures contracts can be a difficult skill that requires practical experience.
While creating an effective trading strategy can be challenging, modern crypto platforms make these financial products intuitive for traders of any skill level.
When used effectively, crypto futures contracts provide investors with several unique advantages compared to standard spot markets.
capital efficiency,
An important component of crypto futures trading is leverage. Investors use margin to create leverage.
Margin refers to individuals using assets as collateral to obtain loans for additional funds used in trading.
The amount that the trader allocates for margin when they first open the position is known as the initial margin. The remaining funds they keep in margin accounts to keep their positions open are called maintenance margin.
Leverage is the ratio between the money deposited as collateral and the amount traders are prepared to trade after obtaining the loan. Leverage allows investors to increase their “trading power” by creating larger positions with a relatively smaller amount of funds.
Futures investors use leverage for various reasons. If a trader has a high degree of conviction about a particular trade, they may want to use leverage to make the most of that market opportunity.
Traders who want to open several positions simultaneously can also choose to use leverage. Leverage for aggregating several trades allows traders to use smaller amounts of capital across several trades while maintaining the same trading power. Different leverage rates may apply depending on the underlying digital asset and the amount traded.
Finally, traders can choose to use leverage to keep larger crypto portfolios away from an exchange. Those who follow the words “not your keys but not your coins” may choose to use leverage. They do this to effectively trade the same amount as their portfolio, but still keep crypto safe from attackers who follow self-custody best practices.
It is important to know that just as leverage can increase profits from winning trades, it can also increase losses from unsuccessful trades. It is highly recommended to understand leverage trading risks before purchasing futures contracts.
Abbreviation,
Another unique feature of cryptocurrency futures contracts is the ability to short an underlying cryptocurrency.
Shorting or “going short” an asset allows a trader to profit when the fiat price of the underlying asset declines. This differs from spot trading, where traders can often profit from buying an asset at a lower price before selling it at a higher price.
A trader who wants to go short will enter into a crypto futures contract agreement with a counterparty who wants to go long on the same underlying asset. With this agreement, the person going long agrees to purchase the underlying asset from the seller (the person going short) at a certain price in the future (or to exchange the cash equivalent in settlement).
Many traders choose to use futures contracts when betting against assets they consider to be overpriced in the market. Traders may not want to keep the underlying asset in their portfolio because they may think that the asset is worth more than it is actually worth.
Therefore, traders can use futures contracts to avoid direct exposure to an asset they believe is overvalued while still making a profit if their assumptions are correct.
indirect exposure,
Crypto futures contracts are a type of derivative, meaning they derive their value from an underlying asset.
Thanks to various arbitrage mechanisms, futures contracts closely track, but do not always track, the price of assets such as Bitcoin (BTC), Solana (SOL), or Cardano (ADA). The fact that crypto futures contracts simply track the price of an asset means that investors do not have to buy, sell or hold those assets.
This feature allows investors to gain exposure to crypto price volatility without having to move assets between cryptocurrency exchanges, create crypto software wallets, or worry about keeping their assets safe.
Many feel that gaining exposure to cryptocurrencies without the need for custody is a win-win — especially for institutional investors who struggle with crypto custody but still want exposure to the space.
Because of their indirect exposure, futures contracts may be taxed or regulated differently than spot trading, which may provide advantages for certain investors.
As a result, futures opened the crypto market to these major financial firms. Individuals who want to access cryptocurrencies and price movements through derivative investment instruments can choose to trade crypto futures instead of trading crypto in the spot market.
High liquidity,
Many attribute the increasing participation of institutional investors in the crypto space to the high liquidity of crypto futures markets. Liquidity generally refers to the health of a market and how many active buyers and sellers there are in it.
High liquidity means a healthy market with lots of trading activity. This makes it easier to complete transactions of any size at any time more cost-effectively. It also reduces the likelihood of drastic price changes and reduces the amount of slippage that occurs. The opposite can be said for markets with poor liquidity.
For the average trader, highly liquid futures markets mean they are more likely to find counterparties to trade against a set of settlement dates.
Higher liquidity also makes it easier for traders to exit futures positions before the settlement date is reached. This makes it more cost-effective for futures traders with open positions to sell their positions to new market participants who may want to make their first trades.
hedging,
Hedging is a trading strategy used by traders who want to reduce their risk of loss if prices move against their thesis. Effective hedging is often the biggest difference between a winning or losing trading strategy in the long run.
Hedging involves opening existing trades in the opposite direction such that the profits of the hedging position offset the losses of the primary trade.
Investors use futures contracts to hedge their positions when they are concerned that markets may move aggressively in the opposite direction of their thesis. A trader may choose to hedge their positions when there is indecision in the market or when they feel less clear about which direction prices might go.
Since crypto futures allow traders to go short, it is possible to cover long spot positions by opening short futures trading. Doing this can mean that a trader makes a position profit or a portfolio profit regardless of which direction the market moves.
In some cases, a trader can break even only after calculating the profits and losses from both opposite trades. However, thanks to the leverage and increased capital efficiency from crypto futures, they can make an overall profit from hedging their long positions.
low wages,
Compared to spot market trading fees, futures contracts typically offer lower fees than similarly sized spot market positions.
Investors who place multiple trade orders across multiple price levels may find that futures contracts are a more cost-effective strategy.
