Like traditional financial markets, futures contracts have entered the crypto industry as well. Many people are quite familiar with trading in stocks and commodities, but now the crypto world is evolving and so is trading cryptocurrencies.
Bitcoin (BTC) is the first and the biggest cryptocurrency in the world. Bitcoin futures contracts are carried out by traders on crypto exchanges like Binance, Bybit and many others.
Contents
Bitcoin futures trading allows buying and selling of Bitcoin at an agreed price on a set date and lets traders access price fluctuations without taking its possession.
Futures trading can offer high returns and diversification, but it also comes with high risk and requires constant market monitoring
In this article, we will help you to understand everything from the basics of futures trading, its benefits and risks. We will also provide a step-by-step guide on how to execute a crypto futures contract.
What is Crypto Futures Trading?
Crypto futures are an agreement between two parties that agree to buy or sell an underlying asset like Bitcoin, at a predetermined price in the future. It is a type of regulated derivative trading contracts.
How Does It Work?
As said earlier, future trading needs two parties for a contract to be executed. These contracts allow traders to bet on future prices without holding the cryptocurrency. Traders can either go long (buy) expecting that the price will rise or short (sell) expecting that the price will fall on the selected asset.
Moreover, in trading, leverage permits investors to control larger positions even if they have a limited/ small capital.
Example: Imagine if Bitcoin is presently trading at $90,000, and you are confident that the price is going to rally in the next 30 days. You will enter into a futures contract agreeing to buy 1 Bitcoin at $90,000 at a specified date in the future. Now, if the price of Bitcoin reaches $100,000 after 30 days, you can still buy it at $90,000 (as per the futures contract price) and can make a profit of $10,000.
If the price drops to $80,000, you have to buy at $90,000 (as per the futures contract price) but would make a loss of $10,000.
Futures trading is different from spot trading. Traders exchange assets immediately in spot trading while in the futures contract, the price movement is speculated and the trade is executed on a future decided date.
Features of Crypto Futures Contract
There are a few things to consider in future trading as they help traders manage their risk and reward.
Leverage
If you want to make a big trade in futures trading but have limited capital, here’s when leverage comes into the picture. It allows traders to control larger positions with a small capital. It is like using borrowed funds to increase your market exposure.
For instance, if you have $1000 capital in your trading account and you feel it is too less for the amount of profit you are looking for, you can opt for 10x leverage. This allows you to open a trade worth $10,000.
Leverage is one of the biggest attractions for traders, helping to amplify potential profit. However, it also increases the risk of liquidation. This means a trader can make a loss of his entire $1000 capital if the market goes against his expectations.
Expiration Date
Futures contracts have a specified date on which they expire and become untradeable. In this case, one party must buy and the other must sell the asset at the pre-agreed price on or before the specific date as per the contract terms and conditions, regardless of the actual market price at that time.
However, both parties do not always have to wait until the date expires to settle their positions. They can exit the positions and sell their contracts to other investors before the expiry. This allows them to take profit or cut losses before the final settlement.
In addition, there are perpetual futures contracts that have no expiration date. It means that an investor can hold his position as long as he wants.
Advantages of Crypto Futures Trading
Hedging
Futures trading can be used to hedge against market volatility and diversify crypto portfolios.
Example: If you have purchased an asset like Bitcoin in the spot market and hoping the price to go up. But, if Bitcoin crashes, you can recover your loss by taking a short position in the futures market.
24/7 Trading
Unlike traditional financial markets like forex and stock that primarily trade during standard working hours, crypto futures contracts trade 24/7. No matter where you are or what time it is, you can trade crypto as per your convenience.
Portfolio Diversification
Futures trading provides an opportunity to diversify your portfolio by gaining more market exposure and asset class.
Disadvantages of Crypto Futures Trading
High Complexities for Beginners
Crypto markets are highly volatile. If you are a beginner, you need to have a thorough understanding of related complexities and risks. You ought to know how futures contracts work in real time and also about technical analysis to make predictions on the basis of charts. Otherwise, you will end up making permanent loss of capital.
Implied Fees
Every time you open and close a trade, there is a fee applied. There’s also a fee to keep a trade open for too long. If you’re making small returns, these fees can eat up all your profits.
Amplified Losses in Leverage Trading
Despite the fact that leverage allows investors to control a larger position with a smaller capital but if the price moves against your position, it can lead to substantial losses. The exchange can even forcefully close your trade (called liquidation).
Different Trading Methods
By now, you must have understood how crypto futures trading works, its benefits and risks. It is also important to know how it is different from other forms of trading in the crypto space.
There are four major types of trading apart from futures, which include spot trading, margin trading, and options trading. They each have different purposes and mechanisms, whether it’s for long-term investment, short-term speculation, or risk management.
Spot Trading
It is the simplest form of trading. Imagine you walk into a store to buy an item, you pay for it and immediately own it.
Example: You buy Bitcoin at the current market price from an exchange and sell it immediately or can hold it in your wallet or sell it later when the price goes up.
Margin Trading
Margin trading is when you borrow money from the exchange to buy more crypto than you actually can. It is more like your credit card; you have $100, but you borrow $400 more, you now have $500 to trade.
This gives you a chance to earn handsome returns if the price goes up, but if the price crashes, the exchange might forcefully sell your assets to cover their money. It’s a high-risk, high-reward trading.
Options Trading
Options trading gives a trader the right, not the obligation to buy or sell an underlying crypto asset at a specified price at a later date. The price is called the strike price and the deadline is called the expiry date.
Options trading is therefore risky, especially for traders with less market experience. Options trading are of two types: calls and puts.
| Feature | Futures Trading | Spot Trading | Margin Trading | Options Trading |
| Ownership | You do not own the asset, a contract to be executed in future on the basis of speculated price. | You own the actual asset (e.g. Bitcoin). | You own the asset but borrow funds for the larger position. | You do not own the asset, a contract giving you the option (right not obligation) to buy or sell. |
| Leverage | High leverage (e.g. 25x–125x). | There’s no need for leverage in Spot trading | Leverage available (e.g. 2x–10x). | Indirect leverage but limited risk. |
| Risk Level | High. You can lose your entire margin due to leverage. | Low. You only lose what you invest. | Higher. You can lose borrowed funds and face liquidation. | Medium. The risk is limited to the premium paid. |
| Profit Potential | Can profit in both directions (long or short). | Only happens when the price goes in favour of your position. | Can profit when price goes in your favour. | Can profit when price moves in any direction, depending on your strategy. |
| Expiration | Fixed expiration date (except for perpetual contracts). | No expiry date. You can hold assets as long as you want. | No expiration date. But, you need to repay the borrowed funds. | Expiration date as per contract terms… |
| Liquidation Risk | If the margin isn’t maintained, the position can be liquidated. | No liquidation risk. | If the price moves against your position, borrowed funds can be forcefully liquidated. | No liquidation, but the option expires if it’s out of the money situation. |
| Beneficial | Experienced traders wanting to hedge or speculate. | Beginners & long-term investors. | Intermediate traders looking to amplify gains. | Advanced traders using complex strategies. |
Step-by-Step Guide for Crypto Futures Trading
To trade crypto futures, you need an exchange. There are many crypto exchanges out there that have futures trading services available on their platforms, but it’s important to choose a reputed and trusted one, especially based on user experience.
Let’s take an example of Binance and understand how you can trade crypto futures contracts here.
Step 1: Sign Up for Binance Account
- Go to Binance.com and sign up to open your account.
- You then need to complete the KYC (Know Your Customer) verification process to unlock all the trading features.
- You need to pass a quiz before Binance lets you trade on its platform. This is just to make sure that you understand the risk of leverage trading.
Step 2: Choose Futures Contract
There are only two contracts available:
- USDT-M Futures – Uses USDT as collateral (this is popular).
- Coin-M Futures – Uses actual crypto as collateral.
Step 3: Deposit Funds into Binance Futures Account
- If you’re trading USDT-Margined Futures, you will need to deposit USDT (Tether).
- If you’re trading Coin-Margined Futures, deposit the actual crypto (e.g. BTC for BTC futures).
Step 4: Select Leverage and Place Trade
As mentioned earlier, leverage lets you trade with more capital than you actually have. Binance allows you to adjust your leverage, but it’s usually from 1x to 125x.
If you are a beginner, you should probably start with a low leverage (5x to 10x) to reduce risk. All you need to do next is enter the amount you’re willing to invest.
Risk Management Tools
As the crypto market is highly volatile yet profitable, it comes with numerous risks. The risk factors can be managed by using tools such as TP or SL. We will understand them in detail:
TP or Take Profit order:
It is also known as ‘limit closing order’, where you set an exact price. This is like you commanding the system to automatically sell your contract when the price reaches a certain profit level. If you don’t set a TP, you might hold the trade for too long, and the price could drop before you close your position.
SL or Stop Loss Order:
It is your safety net. It is a kind of order that a trader sets to limit his loss or lock in the remaining profit on his existing position. Moreover, if you’re trading on margin, losses can pile on quickly. And if your margin balance gets too low, the exchange will automatically close your trade (liquidation). A stop-loss helps prevent liquidation by closing your trade before your margin runs out.
After making all the above settings, you can click the ‘Buy/Long’ button or ‘Sell/Short’ button to confirm position.
Conclusion
Crypto Futures Trading gives traders an opportunity to speculate on price movements of cryptocurrencies and make profit from an underlying asset without even owning it. However, it also comes with high risk, especially when using leverage. If you’re new to futures trading, start with low leverage, use risk management tools like stop-loss order and taking profit order.
