Table of ContentsToggle
- A brief introduction to what is crypto futures trading and what are its special features.
- Differences between crypto spot trading, margin trading, crypto Futures trading, and even options trading.
- Exploring all the advantages of crypto futures trading, from leverage, simplicity, profitability, hedging, flexibility, and a lot more.
- Also exploring the major disadvantages of crypto futures trading, from over-leveraging to crypto ownership issues.
Introduction to Futures Trading in Crypto
Futures trading in crypto is a relatively newer concept, when Bitcoin Futures trading was launched for the first time in December 2017 by the Chicago Mercantile Exchange (CME). It is a concept of owning a contract that is derived from an underlying asset, Bitcoin or any other crypto in this case – and holding it instead of owning the actual crypto asset. Here, the investor or trader possesses the Futures contract of the crypto while the custody of the actual asset and the settlement is handled by the exchange itself.
Of late, it has become a very popular method employed by traders and investors to stay invested in cryptos without having to go through the hassles of buying and storing these assets. Crypto Futures have a bunch of other distinct advantages over simply buying cryptos including solving issues pertaining to finding liquid markets whenever you want to sell your assets.
Crypto Futures markets tend to be very liquid, thus enabling crypto futures traders to buy and sell at a moment’s notice and thus reduce slippages and improve the efficiency of trading cryptos overall, while also benefiting from the volatility of the crypto assets to profit from them through speculation.
Crypto Futures are also perpetual in nature, which is where they differ from traditional futures contracts. The main difference between traditional and crypto Futures contracts is that traditional ones tend to have an expiry associated with the contract while crypto Futures being perpetual in nature, do not have an expiry and thus enable investors to hold it for longer periods of time without periodically needing any rollovers.
Comparison of Crypto Futures with other Trading Methods
|Crypto Futures vs Spot Trading
|Crypto Futures trading provides access to leverage which increases profit potential in trades as compared to spot trading.
Spot trading, however, allows you to own your asset, whereas in Futures you don’t really own your own crypto, but rather own a contract that is derived from an underlying asset.
|The only similarity is that spot trading happens when you trade the asset itself, while crypto Futures trading is when you trade using a derivative of the underlying crypto asset. Thus both tend to be based on the same asset.
|One of the main differences between crypto Futures trading and spot trading is the benefit Futures provide – i.e. leverage.
This leverage is what allows speculative traders to maximize their profit potential through crypto trading.
|Crypto Futures vs Margin Trading
|The benefit of crypto Futures is that the crypto Futures markets tend to be far more liquid than the others since it is contract based.
However, in margin trading, you get to actually own the crypto asset using the leverage the exchange provides the trader.
|Crypto Futures trading and margin trading are similar in the way that both these methods essentially are two forms of providing leverage to the trade to speculate on the price of the asset.
|The key difference between crypto Futures and margin trading comes in one distinct way. One, crypto Futures allow a range of multiples of leverage that a trader can access while crypto market trading generally has a fixed leverage amount.
|Crypto Futures vs Options Trading
|The main benefit of crypto Futures over crypto options is that options, by nature, are a wasting asset and thus over time tend to lose their value if the underlying does not move. While, in the case of crypto Futures, a trader only loses money if the trade goes against them.
However, the benefit of options trading is that the margin requirement for options are even lower than that of crypto Futures, and also options can be used to profit from a sideways & rangebound market too.
|The similarity between crypto Futures trading and crypto options trading is that both of these are derivative contracts that are derived from the same asset and can be used to trade.
|The main difference between crypto Futures and crypto options trading the way one goes about it. Crypto Futures is a simpler concept and simply going long or short is easier to do.
However, with options, traders are enabled to buy calls, and put options based on the direction they think the underlying asset is going to take – and also create strategies to hedge their risk and increase profitability.
Benefits of Trading in Crypto Futures
Let us look at some of the biggest benefits of trading crypto Futures:
- Simplicity & Convenience: One of the biggest benefits of crypto futures trading is the simplicity it provides. It provides a method to simply invest in crypto assets, speculate on their price movements, and profit from it without needing to actually own and safely store the crypto asset.
- Leverage: One of the biggest and most attractive features provided by crypto futures is the concept of leverage. Leverage is essentially the ability to control a large contract value derived from an underlying asset with a relatively small amount of capital.
- Higher Profit Potential: Understanding the concept mentioned above, leverage is what allows traders to make more profits from speculating with crypto Futures contracts with the limited capital they have, thus making it an extremely attractive option for seasoned traders in the market.
- Safety: Crypto Futures markets can also be considered to be safer, especially for people who are in it to trade because crypto Futures contracts have position and price limits in place that enable traders to reduce their risk exposure.
- Flexibility: Crypto Futures contracts allow traders to be a lot more flexible when it comes to their trading strategies. One of the simplest examples being, a trader in the crypto Futures market can easily go short on an asset with ease if they think the value of that crypto is going to go down in the near future. This wouldn’t have been so easy and simple in the case of spot or margin trading. This flexibility also allows traders to execute scalping strategies in the market which isn’t very effective or efficient when it comes to the spot market.
- Price Accuracy: Crypto Futures contracts are perpetual in nature, which means there is no expiry associated with the contract, as is the case with traditional Futures contracts. Thus, this nature of crypto futures enables these contracts to trade very close to actual spot prices without too much diversion. Traditional Futures tend to trade either at a premium or at a discount based on the market sentiment however, in the case of perpetual crypto futures contracts, there is a concept of funding rates that ensures that these Futures contracts trade in line with spot prices.
- Hedging Tool: Crypto Futures can also be used by long-term investors in the crypto markets to limit their downside risk by taking up an opposite position in the Futures against their holdings. This way, the short-term downside risk is reduced, and even make some profit out of it using these Futures contracts.
Read more: Guide to Crypto Futures Trading on CoinDCX
Risks or Drawbacks of Crypto Futures
- Leverage: While leverage happens to be one of the biggest benefits of crypto Futures contracts – it can also be a double-edged sword. Newer traders in the market can fall victim to this and can over-leverage themselves in the market, which can result in a complete loss of capital if the trade goes against them and they are liquidated out of the market by the exchange.
- Ownership: Investors who use crypto Futures to participate and invest in crypto assets cannot enjoy the economic benefit of staking and voting as there is no ownership of the underlying crypto. This can be looked at as a disadvantage as well.
Thus, in conclusion, crypto futures trading has both a number of advantages and disadvantages to it. A trader or an investor must do proper research before getting into this kind of market and trading – where there is a risk of capital wipeout, but at the same time can give you returns in excess of anything else. However, the benefits far outweigh the risks, and with proper knowledge and understanding, it becomes much safer and more profitable too.
Now that we know how leverage is one of the biggest advantages, CoinDCX Futures provides up to 25x leverage on 150+ trading pairs that we offer. CoinDCX Futures also provides on-ramp fiat to crypto services too. Users can deposit INR, buy USDT, and trade Futures, all on one platform without any P2P risks, as is the case with other exchanges.
Why do people trade crypto Futures?
Crypto Futures trading is an attractive proposition for seasoned traders as it provides access to leverage that can potentially multiply profits far in excess of spot trading.
Is it profitable to trade crypto Futures?
Yes, it is far more profitable to trade in crypto Futures as it employs the concept of leverage, where with limited capital you can purchase a contract that has a value greater than the capital you put in, thus increasing ROIs.
Why is crypto Futures trading better than options?
Crypto Futures trading has one benefit over options trading and that is the fact that options are a wasting asset since there is a concept of decay in option prices, thus over time option buyers can lose money in trades too.
Dive into the perpetual vs quarterly futures debate for informed trading decisions!