Cryptocurrency futures – are they really the instrument of the future?

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09.11.2021
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Cryptocurrency Futures

In the sphere of digital assets, you can often find such a term as cryptocurrency futures. We explain the meaning of this concept and its function.

What are cryptocurrency futures?

Futures is an agreement for the acquisition of an asset in the future at a price agreed in advance. The subject of the transaction can be any commodity or money (oil, grain, cryptocurrency, gold, etc.).

Such contracts allow minimizing the risks associated with possible force majeure events that affect pricing. Futures were previously used in various fields, and today they are often used in the cryptosphere, helping participants in transactions to avoid problems associated with asset volatility and other possible risks.

How do cryptocurrency futures work?

The principle of operation of a futures contract is as follows: the seller undertakes to provide his goods at the agreed price, and the buyer - to transfer the required amount to him. Thus, the first one knows his profit in advance, and the second one can plan future expenses.

In addition, the contracts themselves can be bought and sold, making them a tool for speculation.

In other words, the purpose of a futures contract can be:

  1. receiving income from price fluctuations,
  2. hedging, or risk protection.

Experienced traders talk about the advisability of combining the two above-mentioned futures purposes, as well as opening a position in both directions. On the exchange, they are designated by the concepts of “long” and “short”. Despite the fact that the terms are taken from economics, they have nothing to do with the duration of the trades. A long position is opened when predicting a price increase, a short, on the contrary, when the price is likely to decline.

What are cryptocurrency futures?

In accordance with the generally accepted classification, there are two types of cryptocurrency futures:

  • calculated,
  • delivery.

The former are contracts that do not imply physical transfer of the object. This type includes, for example, bitcoin futures.

In the second case, the asset will be transferred to the buyer when the futures expire.

For bitcoin futures, the classification by expiration is also applicable. In this case, a distinction is made between:

  • serial,
  • quarterly futures.

Most futures are quarterly - the last trading day falls on the 15-20th of each quarterly month. Serial futures are contracts in which the trade completion date differs from the quarterly date.

Leverage: Is it beneficial or risky?

Leveraged futures are most often viewed separately from the existing classification. The peculiarity of this type of agreement is that they can bring both increased profits and significant risks. Additional profit is provided by increasing the position volume using leverage, and the risk lies in the fact that in case of an error in the forecast, the exchange will automatically close the position to avoid losses, and the trader will have to pay a large sum.

However, leveraged futures are considered to be popular financial instruments among crypto market participants, as they allow capital to be used as efficiently as possible. For example, buying 1 BTC will require thousands of dollars, and due to leverage, it is possible to pay the sum partially.

Advantages and disadvantages of futures trading

Futures trading has both advantages and disadvantages. The advantages are:

  • the opportunity to make a profit both with an increase in the value of assets, and with their fall;
  • the availability of trading;
  • gaining significant access to an asset when paying only a part of its value (due to leverage);
  • the possibility of hedging the investment portfolio.

The disadvantages are:

  • volatility. In forecasts of the situation on the crypto market, you can make a mistake and, accordingly, incur losses.
  • high risk. The attractive leverage for traders makes cryptocurrency futures one of the most risky trading instruments.

It is especially important for new coming market players to develop a robust risk management strategy. Significant factors are the choice of a reliable exchange as a trading platform; trader's personal qualities, such as poise, are no less important, since profit is associated with the decisions made, and emotions are a bad advisor when thinking about strategies and forecasting

Thus, it is worth starting futures trading for people with strong nerves and good preparation.

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