Do you have an interest in trading cryptocurrency? Then, you should have heard that there exist different strategies, trading styles, and plans to do that. They range from staking, spot trading, trading leveraged tokens, futures trading, etc. So with this stated, you should have a hint about what cryptocurrency futures mean right now. Believe me, it doesn’t mean the crypto you’d trade in the future but rather more like bringing future capital to trade presently in the crypto exchange. Thus, stick on tight to this page to see cryptocurrency futures defined and how they work on exchanges.
So, to make things easier to comprehend, our group of professionals here at Blockfarm.club has organized all you need to understand the intricacies of futures trading better. If you carefully read through this page, you’d discover why cryptocurrency futures provide better opportunities compared to option trading and spot trading.
More so, you’d know how to open long and short positions on multiple digital exchanges. So, relax and take a deep breath as you proceed.
What Are Cryptocurrency Futures?
We can refer to cryptocurrency futures as contracts between two investors betting on a cryptocurrency’s future price. They give investors access to gain exposure to choose cryptocurrencies without purchasing them. Crypto futures has similarities with standard futures contracts for stocks or commodities because they enable you to bet on the price trajectory of an essential asset.
Furthermore, many cryptocurrency exchanges have options for trading with the Crypto futures. Also, the Chicago Mercantile Exchange has an option for users to use the cryptocurrency Future feature.
Meanwhile, we sighted the first Bitcoin futures contracts listed on Cboe in early December 2017 but soon they terminated them. However, the Chicago Mercantile Exchange (CME) established its Bitcoin futures contracts in December 2017 as well. Then, they traded the contracts on the Globex electronic trading platform. Thus, now Ether and Bitcoin futures based their reference rate on the CME CF Bitcoin Reference Rate and the CME CF Ether Reference Rate respectively.
Nonetheless, when we refer to Futures contracts of any underlying asset, it still represents the asset but in a derivative form of the asset. Cryptocurrency futures give you access to some assets in the Futures feature to trade them with the more increased power of stake than what your deposited capital is.
Additionally, the contracts usually have a specific number of units, marginal requirements, pricing, and settlement methods that investors must meet.
How Crypto Futures Trading Works On Exchanges
If you had seen the operation of cryptocurrency futures trading on a crypto exchange platform like Binance, it seems difficult to tell the difference from regular trading. It appears so mainly because traders specifically do the same thing in both cases. Which includes opening long and short positions and implementing proper risk management strategies.
Nevertheless, there exist many differences between futures contracts and spot trading because they don’t run with the underlying assets but only with the asset price action. Without the actual asset, the futures market has way more liquidity and seems easier to handle. Also, in future trade, they allow margin trading with high leverage.
There exist three main components in a crypto futures contract feature. They include;
- Expiration Date: The expiration date bears reference to the date when the futures contract must become settled. Hence, one party has to buy, and the other party has to sell at the pre-agreed price but it has to occur within the set time.
- Units Per Contract: This defines how much each contract worths is of the underlying asset. Thus, varies from platform to platform. For instance, 1 CME bitcoin futures contract is equivalent to US dollars worth of 5 bitcoins denominated in U.S. dollars. While 1 bitcoin futures contract on Deribit equals 10 U.S. dollars worth of bitcoin.
- Leverage: Exchanges enable users to borrow capital to increase their trading size to increase the potential gains a trader can make on their futures bet. We refer to this feature as leverage. However, leverage rates greatly vary between platforms. For example, Kraken and Binance allow users to supercharge their trades by up to 50x.
You can settle future contracts in two different ways and they include;
- Physically delivered: This means upon settlement, the buyer buys and receives bitcoin.
- Cash-settled: This implies that upon settlement, there will be a transfer of cash (U.S. dollars majorly) between the buyer and seller.
Where Can I Trade Crypto Futures?
Crypto-based futures products has grown exponentially and gained wide popularity over the last five years. Hence, there now exist a wide range of crypto-native and traditional platforms where you can begin trading crypto futures.
Some of the leading examples of platforms providing cryptocurrency future trading features include;
Risks Of Crypto Futures Trading
Regardless of the myriad of benefits, you can gain from trading crypto futures, you also stand to encounter many risks predominantly margin calls and liquidation. As futures trade involves borrow of funds from exchange to increase trade size, you all so stand chances of losing all your capital. Specifically when the trade goes against you.
Normally, no exchange would allow you to borrow funds without putting up some sort of insurance in case the trade goes against you. We refer to this insurance pot as an “initial margin” that a trader has to set aside before they can open a leveraged trade. Therefore, similar to how your potential gains become turbocharged while using leverage, so are your losses.
In situations where the market goes against a trader and their respective margin account depletes. Thus, they can incur something known as “liquidation”. Liquidation means your position when you exchange automatically closes your position and your initial margin taken.
Here are a few terminologies in cryptocurrency future trading you have to get accustomed to;
- Margin account: This refers to where we keep the initial margin (the minimum amount of collateral required to open a futures trade).
- Margin calls: A margin call refers to when an exchange informs or warns a user that the capital in their margin account is becoming low.
- Maintenance margin: This includes the number of funds a user must have ready to transfer into their margin account if their initial margin runs out. See it as a backup fund.
Frequently Asked Questions About The Cryptocurrency Futures
What Is Futures Expiration In Crypto?
Future expiration is the set date a cryptocurrency futures contracts traded at the CME, like Bitcoin and Ether futures will expire. For BTC and ETH, they expire on the last Friday of the month at 4:00 pm London time.
Are Crypto Futures Legal in the U.S.?
Yes, the US has legalized Cryptocurrency futures and you can trade on authorized cryptocurrency exchanges or the CME using specific brokers.
Where Can I Short a Crypto in the U.S.?
There exist several places you can short crypto in the US. Examples include the Chicago Mercantile Exchange or cryptocurrency exchanges authorized in the U.S.
Finally, the majority of institutional and retail traders prefer using cryptocurrency futures. Probably because of its convenience and lower risk of hacking attacks than the spot market.
Nonetheless, Crypto futures still have more popularity than crypto options, representing other types of derivatives. An example includes the option contract, where the buyers of the option have the right but not the obligation to buy the underlying asset in the case of a call option and vice versa.
So, if you still have further questions about cryptocurrency futures and how they work on exchanges feel free to ask us. You can do this using the comment box below.