Cryptocurrency traders use different methods to trade cryptocurrencies and not all of them may be suitable for everyone, while some methods are very popular as almost every crypto investor uses them, others like futures trading, are not so common.
In this article, we answer important questions: What is futures trading in cryptocurrencies? What are the risks of futures trading?
Cryptocurrency futures trading is a type of derivative trading that involves speculating on the future price movements of digital assets such as Bitcoin, Ethereum, and Litecoin. By entering into a contract to purchase or sell an asset at a predetermined price at some point in the future, traders can take advantage of short-term opportunities while limiting their risk exposure. This article will discuss what cryptocurrency futures trading is and its associated risks.
Cryptocurrency futures are contracts between two parties agreeing to buy or sell an underlying asset at some point in the future for either cash (spot) or deferred delivery (futures).
The buyer agrees to pay a certain amount now for delivery later while the seller agrees to deliver it later against payment now; this allows both parties involved in the transaction to hedge their positions by locking in prices today rather than waiting until tomorrow when prices may have changed significantly due to market volatility. Futures contracts also allow traders with different views about where prices will go next time frame up bets against each other without having any actual ownership over cryptocurrencies themselves – meaning they don’t need large amounts of capital upfront like traditional spot trades do – which makes them more accessible for smaller investors looking for quick profits from short-term moves within volatile markets like cryptoassets often experience.
However, there are several risks associated with cryptocurrency futures trading that should be taken into consideration before engaging in this activity: counterparty risk, liquidity risk and margin requirements among others. Counterparty Risk refers specifically to potential losses incurred if one party fails fulfill his/her obligations under terms agreed upon; Liquidity Risk pertains mainly how easily tradable assets can be converted back into cash quickly if needed; Margin Requirements refer minimum amount funds required deposit account order open position maintain leverage ratios set brokerages house offering services clients interested participating marketplaces alike .
All these factors must weighed carefully ensure successful venture undertaken given situation understanding all implications prior execution transactions paramount success profitability end goal investor mindset day trader long term holder alike!
What is futures trading in cryptocurrency?
A cryptocurrency futures contract means an agreement to buy a specified cryptocurrency at a specified price at a future date, the times agreed upon can range from 24 hours to several years.
This is often referred to as gambling and the term futures trading is used because the parties involved in the transaction usually base their trades on speculation about how asset prices will behave in the future.
No matter what happens, the deal will be executed at the agreed date and time, and usually only one of the two who agreed to the deal will benefit from it.
Several trading platforms offer users to trade cryptocurrency futures contracts, including Kraken, BitMEX, Bybit, and eToro.
How does cryptocurrency futures trading work?
Futures traders usually speculate about how the price of a crypto asset will move in the future. Their conclusions are based on predictions that an asset will perform a certain way on a particular day, which may be based on fundamental or technical analysis using some metrics, or sometimes both.
For example, a trader can open his futures short position on a contract to sell Bitcoin at a certain price on October 23, 2022.
Anyone who wants to enter into the trade opens a long position in the contract, assuming the agreed price is $30,000 per bitcoin, and the current price is $23,000, the seller will sell at a profit if the bitcoin price remains below $30,000 while the buyer loses.
On the other hand, if the price of Bitcoin reaches $45,000 on October 23rd, the buyer wins. You can cancel a futures contract by entering the trade corresponding to the one you initially opened,, and the contract must be fulfilled once the agreed day is reached.
To increase their potential earnings, futures traders sometimes borrow money from the exchanges they trade in to increase their trading volume. This is called leverage and is a multiple of your original trading volume.
For Trade X the leverage can be 10x, 20x, 50x or even 100x depending on the trading platform, be aware that borrowing to expand a position can backfire if the trade is not in your favour, it will be liquidated and your money will be lost forever so it is a very risky venture .
What are the risks of futures trading?
There are risks associated with futures trading, but if done correctly, it can be profitable. Using leverage, for example, not only increases your potential gains, but also your potential losses, which is very risky.
This is even more acute in the highly volatile crypto market. Before an exchange lends money to use leverage in futures trading, it must allocate an amount called initial margin as insurance against losing trades. It is held by the exchange and can only be accessed after winning the trade and paying back the money.
If you lose a trade the exchange will automatically liquidate your position and close the deal, as a result the capital deposited as initial margin will be lost permanently, this is why leveraged trading is not recommended for inexperienced traders.
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