As the financial world becomes more and more tech-driven, young people flock to cryptocurrencies increasingly because they find those big gains very promising. But despite the buzz, it’s well-known that the market can be volatile and lead to losses and not just to substantial profits. For those who aren’t willing to take the risks associated with owning cryptocurrencies directly, the futures market may provide a steadier and more structured path. While many individuals are familiar with futures contracts in traditional finance, where they can trade commodities such as gold, oil, and agricultural products, these contracts are also part of the crypto market these days, and they can provide a way to manage risk more effectively.
Understanding The Basics Of Cryptocurrency Futures
Cryptocurrency futures refer to contracts between two investors who agree to buy or sell a specific cryptocurrency at some point in the future. Its purpose is to enable market participants to mitigate the risk of price fluctuations in an asset, allowing them to gain exposure to crypto without buying it directly. Cryptocurrency futures contracts trade on cryptocurrency platforms, and they initially started to be listed on them back in 2017; however, they were discontinued until January 2024.
Regarding the lifespan of a cryptocurrency futures contract, there is a specific date when the contract expires, and a futures trader must manage the expiration. There are three choices when it comes to the expiration of the futures contract, namely:
- Offsetting the position or liquidation. This is the most common way of exiting a trade, which requires a trader to implement an equal and an opposite transaction to neutralize the trade. For instance, suppose a trader shorts two btc futures contracts that have the same expiration date. The difference in price between the initial position and the offset position of the trader reflects the profit or loss of that particular trade. Traders can end the contract before its expiration date, thus avoiding final delivery. Most futures contracts don’t actually lead to delivery, and this is because the entire process can be costly as well as inconvenient.
- Rolling over a crypto futures contract. Suppose a trader wants to maintain their market exposure by using the futures contract; one way to do so is to roll it forward. At the same time, a trader will offset their existing position and set up a new one in the next contract month.
- Settling a crypto futures contract. Suppose a trader doesn’t roll or offset their position; the contract will expire, and, in this case, the settlement will happen. In this case, the party who has a short position must deliver the underlying asset based on the contract’s agreements.
What Are The Benefits Of Crypto Futures Trading?
One of the biggest advantages of trading Bitcoin futures is that they provide regulated exposure to digital assets. This is a major point in an ecosystem that experiences wild price fluctuations, and it offers recourse and confidence to institutional investors. Besides this advantage, there are other benefits to consider:
- Increased safety. Compared to owning crypto directly, Bitcoin futures contracts provide a higher level of safety, as there are positions and price limits, allowing you to curtail your risk exposure to cryptocurrency.
- Simplicity. Bitcoin futures make it easier to invest in Bitcoin, as there’s no need to use a wallet or opt for custody solutions for security and storage when trading. Furthermore, cash-settled contracts help eliminate the risk of physically owning an asset that is so volatile.
- Position limits. Position limits differ from one exchange to another. For instance, some of them may offer a position limit adjustment feature that allows you to manually reconfigure limits by considering margin amounts and past trading history. On the other hand, other exchanges offer a maximum number of futures contracts for a specific cryptocurrency.
Interpreting Volume: Important Considerations
In crypto futures trading, volume refers to the number of contracts that are purchased and sold at a specific time, indicating how liquid and active the market is. There are two important things that you need to keep in mind:
- A high volume means active trading, which attracts more buyers and sellers and helps ensure prices remain stable.
- Low volume can cause prices to jump around more, making it crucial to monitor changes in the market.
Moreover, when checking the volume, it’s essential to consider how it relates to price swings. This is important for two reasons:
- When the price increases with high volume, it reflects a strong trend in the market.
- When the prices increase while the volume remains low, it means that there isn’t a strong change, and it could always back down. The mismatch between price and volume can indicate changes for traders.
Volume also plays a role in understanding liquidity, which essentially refers to how easily you can buy or sell an asset without affecting its price significantly. High liquidity means that traders can buy and sell rapidly with small price swings, while low liquidity can lead to delays and more significant price changes. Understanding the relationship between price, volume, and liquidity is essential for reducing risks and making smart trading moves.
Equip Yourself With The Right Resources And Tools When Trading Crypto Futures
Before trading cryptocurrency futures contracts, you need the right resources in your toolkit. Fortunately, there are platforms online that provide real-time crypto futures data, technical indicators, and charting tools, helping you analyze trading decisions and stay up-to-date with the market’s changes.
Moreover, you can find many educational resources, communities, and trading courses, which are all very helpful for someone who is new to crypto futures. These platforms provide you with useful insights into the best strategies to trade crypto futures, how to manage risks, and how to conduct market analysis. So, make sure to take advantage of them, as this will help you approach the market in a smarter way and make your journey much more seamless.
The Bottom Line
If you want to ride the crypto wave with more ease, crypto futures contracts may be the solution for you, as they enable you to access price swings without owning cryptocurrencies. As a result, you can avoid the risks associated with buying actual digital assets, which can be more convenient if you aren’t ready to commit to everything that crypto trading means.