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What is Crypto Futures Trading?

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Although there are many ways to get into cryptocurrencies, futures trading is considered one of the most convenient and popular ways to trade. This type of trading allows investors to get exposure to multiple digital currencies at the same time. In addition to being more profitable, futures trading also provides investors with better opportunities compared to traditional options and spot trading.

Unlike stock or commodity futures, which are typically bets on the price of an asset, futures trading for cryptocurrencies allows investors to speculate on the future price of a digital currency. Bitcoin futures are the most popular type of contract for this type of trading.

How Futures Trading Works

Unlike regular trading, futures trading on a cryptocurrency exchange such as By bit is not different from regular trading. Instead, it follows the same strategy as regular trading. This is because traders utilize the same risk management techniques and open and close long positions.

Unlike spot trading, futures contracts only trade based on the price movement of an asset. They are more flexible and easier to handle due to how they don’t involve the underlying asset. Also, they allow margin trading, which is a type of high leverage trading.

What are Futures Contracts?

Aside from being different from regular trading, crypto futures contracts are also part of a wide variety of trading instruments. These include options, swaps, and contracts for difference.

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Initially, futures contracts were mainly used for certain commodities, such as oil, metals, and food. However, they eventually became more popular due to how they can be used in different financial markets. Most commodity price quotes on financial portals now feature futures.

A futures contract is a type of agreement between two parties that allows them to buy or sell an asset on a predetermined date. It is a type of bet on the price movement of an underlying asset. For instance, a futures contract tracks the price of a stock or a commodity.

Types of Futures Contracts

There are various types of futures contracts that are available for trading on a cryptocurrency exchange. It’s important to note that some platforms do not provide all of these types.

1. Standard

Unlike regular trading, crypto futures contracts for cryptocurrencies have the same aspects as a standard contract. In December 2017, two of the world’s leading financial exchanges, namely the Chicago Board of Trade and CME Group, introduced Bitcoin futures. This was one of the factors that boosted the price of Bitcoin at that time.

2. Physical Delivery Futures

Another type of futures contract that allows investors to bet on the price movement of cryptocurrencies is the physical delivery of the asset. This type of contract was initially introduced by Bakkt, an exchange that is part of the Intercontinental Exchange. Unlike regular futures, the physical delivery of cryptocurrencies is handled during the settlement process.

Due to the popularity of Bitcoin futures, Bakkt decided to only provide this type of contract with physical delivery. This method aims to contribute to the circulation of cryptocurrency.

3. Perpetual Contracts

Another type of contract that’s commonly used by cryptocurrency exchanges is the perpetual contract. Unlike regular futures, this type of contract doesn’t rely on the expiration date. It was initially introduced by BitMEX. Other major platforms such as FTX and Binance have also started to use this type of contract.

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One of the main factors that help keep the perpetual contract from falling below the spot price is the funding rate. This is a type of contract that allows two parties to pay each other for the privilege of trading. The funding rate determines the amount of money that each trader will receive. For instance, if the funding rate is positive, long-term investors will pay short-term ones.

Despite the various features that are available for trading in futures contracts, the growth of the industry will continue to be heavily contested.

Advantages of Futures Trading

Due to the various advantages of futures trading, the popularity of cryptocurrencies has continued to grow. There are many reasons why people should consider becoming a part of the industry.

1. Convenience

Unlike regular trading, futures trading is relatively easy to start. It requires an online account and a secure digital wallet. Because of this, the volume of trading in cryptocurrencies in futures contracts is much larger than that of spot trading.

2. Higher Potential for Profits

One of the main advantages of trading cryptocurrencies with leverage is that it allows investors to make substantial gains. For instance, Bybit allows users to set their leverage to 100x. However, this type of trading can also lead to losses.

3. Flexibility

Compared to regular trading, intra-day trading in cryptocurrencies using futures contracts is more profitable. Because of this, there are more opportunities for people to implement different strategies to maximize their profits. In addition, with the availability of multiple trading strategies, there are more chances for people to make substantial gains.

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4. No Funding Rate

One of the main disadvantages of trading futures contracts is that they do not have a funding rate. Also, since prices are in contango, they offer higher prices than the current spot price. This type of strategy is known as cash and carry arbitrage. This type of strategy combines a long position in the market with a short position in the future.

Unlike spot trading, futures contracts can provide relatively risk-free returns. They can also converge with the price of the market on the day of settlement. This allows investors to make relatively risk-free decisions regardless of the market’s volatility.

Final Thoughts

Retail and institutional investors prefer to trade in cryptocurrencies due to the lower risk of hacking attacks and the convenience of futures trading. Although there are different types of derivatives, such as crypto options, futures are still more popular. In a futures contract, the buyer has the right to purchase or sell the underlying asset. On the other hand, in an option contract, the seller has the right to sell the asset at a predetermined price.

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