Financial markets are the space for money-making for those people who understand the essence of their work and the factors that impact them. One of the oldest as well as the most efficient and also riskiest financial tools used worldwide in futures trading. From the name, it becomes clear that this trident tool is somehow connected with the future. Of course, it is all about asset price.
An underlying asset for futures trading may be anything that has value and changes it – gold and other precious metals, gas, oil, and other commodities. This financial tool involves speculation on the value of an underlying asset or commodity.
So, based on the market analysis, traders “bet” on the future value of gas, for example, and agree to buy or sell it at the price they think gas will reach by a certain day in the future.
Of course, this tool also spread to the cryptocurrency market. Considering its incredible volatility and instability, as well as the youth of the industry, traders make a fortune playing on digital coins’ values. However, that is not as easy as it could seem to be. And behind the seemingly “betting” style, a huge array of work hides.
Let’s see what are futures in crypto in more detail.
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What are Cryptocurrency Futures?
As we said before, crypto futures trading involves a lot of preparational work. It is not that easy to guess the future value of crypto – it takes a lot of time to analyze it and draw a conclusion.
Here are the types of research done before to trade crypto futures:
Technical research. It is a thorough analysis of the coin, and the project that released it focused mainly on its price. Price chart analysis helps investors understand how sensitive the asset to market trend changes and what were its main indicators and patterns in the past. By analyzing the historical indicators, investors get a picture of possible future coin behavior. That is the base for future price forecasting.
Fundamental analysis. The cryptocurrency market does bit exist in a bubble – it communicates and integrates with the external world and totally depends on its situation. For example, when the full-scale war started in 2022, it gradually shook all aspects of the world’s economy, and the crypto industry is not an exception. A large market collapse occurred in the spring of 2022 caused by the war, inflation and the overall investor sentiment. So a successful trader mustn’t only be good at the crypto industry – he should also be a fully developed and educated person who is able to assess the situation in the world and draw conclusions.
Quantitative analysis is the summary of fundamental and technical types of research with the calculation of indicators that help the investor to take a final decision on his trading position. In simple terms, crypto futures imply concluding an agreement to purchase or sell crypto coins based on their price prediction. We will talk about how it works in more detail but first, let’s discuss the advantages and disadvantages of this financial instrument.
Pros and Cons of crypto futures trading
Here are some advantages of this trading technique:
- There is no need to buy crypto coins right away, for crypto futures trading implies making an agreement on operations with coins in the future, not now.
- You should not necessarily have the whole amount of money to buy crypto – even with a small fraction of the sum you are supposed to invest, you can use leverage and enter the deal with a much more profitable position. For example, you have $100 worth in Bitcoins, but you want to enter the position with $1000, so you take a leverage ratio of 1:10 and trade as if you invested $1000.
- Speculation on crypto values allows for making fast profits because crypto rates are volatile.
- High level of liquidity. Pick large-cap digital assets that are always in demand.
- Risks hedging. Picking a leverage ratio allows traders to choose the level of risk they take. Small leverage means small risks.
Disadvantages of forward contracts
- High risks because you can’t be 100% confident about the future coin’s rate movement, especially when the market is highly volatile.
- Forward contracts have an expiration date when a trader owes to fulfill his obligations on purchasing or selling coins.
Let’s talk about how does crypto futures work in practice.
How Crypto Futures Trading Works?
Since crypto futures trading is the riskiest technique, many experienced investors face difficulties when the asset rate behaves not according to the scenario. What helps investors to be consistent and make correct decisions in any unexpected situation is a strategy. Strategy is the core of successful crypto trading, especially when it comes to forward contracts.
Here are the most used methods:
- Trading long or short
- Trading the range
Let’s consider a couple of these methods in more detail.
Long and Short
This method implies that the investor chooses which position he takes – he either believes the coin’s value will increase or drop:
Suppose you estimate that the coin rate will boost in the next, say, a couple of months. So you have a good chance to sell coins at a higher rate. To make it possible, you open the position for selling assets and state the price you think it will reach as well as the expiration date when you owe to sell coins.
If your prediction is correct and the value reaches the heights you estimated, you successfully sell coins and make money on this price rise.
You think that the market is about to drop, and you want to take advantage of this decline. The idea is to sell your coins beforehand (as long as their rate is relatively high) and open the short position. Similarly, you state the expiration date and value. When the day comes, you check the price.
If it is really reduced to the level you pointed out in the agreement, you buy crypto back. Thus, you get money from selling coins and still have those coins in your wallet. S double profit.
While investigating crypto charts, you can see the lines of support and resistance. During market fluctuations, coin values go up and down, crossing those levels and going back in the reserve direction. The line of resistance is the level the coin’s value hardly breaks; the support line is the level at which the price hardly breaks below, which means it cannot fall lower than this support level.
During the price upward movement, it exceeds the resistance line and breaks it to the next resistance line, and then moves back down. If it does not, that is a sign for the investor to open a long position (with the suggestion that the price will grow further).
When the price is moving down, it reaches the support line and may go below it, and then it goes up again to reach the previous support line, creating a pullback, which is an indicator for the investor to open a short position.
We should also notice that in addition to strategies, you should also train your emotions, for extra excitement and frustration are not good friends in crypto trading. Analyze yourself and find the most comfortable trading methodology that would allow you to trade calmly:
- Determine for yourself what risks you are ready to take and which you cannot. Draw red lines which you will never cross.
- Determine your long-term purposes and short-term targets.
- Better make small portions of profit many times with fewer worries rather than taking high risks and a lot of stress.
- Never invest your last money, and understand that you are the only one responsible for your trades.
What is the Safest Place to Buy Cryptocurrency?
The last thing we would like to mention in this article is picking a platform for buying cryptocurrency. Many large and credible crypto exchanges support crypto futures trading, but they all offer different conditions for this financial instrument, from leverage ratio to penalties and position liquidation in the case a trader makes a mistake in the asset’s price forecast.
We recommend using the WhiteBIT exchange, for it is the safest place to buy cryptocurrency and supports perpetual futures contracts. WhiteBIT is a liquid exchange with a huge reserve of funds, which allows it to offer a high leverage ratio for investors in futures contracts. In addition, you may take advantage of perpetual futures with no expiration date.
Such contracts are linked to the spot market asset’s prices and allow traders to keep their contracts open without liquidating their position. Such an option is possible due to WhiteBIT’s financing mechanism. To learn more about this tool, go to the WhiteBIT blog.