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 trading the right to get the underlying asset at a later time, at a predetermined price. This means that the investor who buys a futures contract seeks to gain profits 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 the buyer and the seller regarding the future delivery of the purchased good on a pre-determined date and at an agreed price or the payment to the buyer of a sum of money equivalent to the price of the effective future contract. on the expiration date. On this date, the buyer can freely sell his contract to another person, even before settlement. The price of futures contracts is almost the same as that of their underlying assets. On the other hand, it may differ from the price of the underlying asset, particularly during periods of sharp rises or falls in the markets. Thus, in periods of rise, futures contracts tend to be more expensive than their underlying assets; conversely, in periods of decline, they are generally less expensive.
Each futures contract has several parameters:
- Contract price – sum of money paid by the buyer to the seller for the contract;
- Term of the contract – when the physical delivery or credit of money to the holder of the contract is due;
- Expiry date – for fixed futures contracts, this is the date the contract holder will receive their asset or the amount of money based on the contract price in effect on that date.
In addition to fixed-term contracts, there are also so-called perpetual contracts. They do not provide for an expiry date, i.e. 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 is futures trading different from other financial instruments?
The main difference between traditional (spot) trading and futures trading is that by trading contracts, market participants do not obtain the underlying assets (i.e. 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 major difference is that the liquidity of the futures market is much greater than that of the spot (spot) markets. This allows positions to be opened on a larger scale with minimal impact on the price.
3) What are the advantages of crypto-futures?
Cryptocurrency futures trading has obvious advantages over spot trading:
- Higher liquidity than in 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 influence 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 preference of the trader.
- 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 option to open long and short positions to take advantage of bull and bear markets.
4) What are the most common risks associated with cryptocurrency futures?
Apart from the advantages, trading crypto futures also has disadvantages.
- First of all, margin trading can result in significant losses, so the trader should 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 allowed by law in the DACH countries, namely Austria, Switzerland and Germany. Financial regulators 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 of money equal to the difference between the pre-determined price and the spot price of the asset. , based on the current contract price.
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