What Is Futures Trading in Crypto and How Does It Work?
There are many ways to get exposure to cryptocurrencies, but futures trading is one of the most popular and convenient approaches. Here are all you need to understand the intricacies of futures trading better.
In which it can provide better opportunities compared to spot trading and options trading. To know how to open long and short positions on multiple digital currencies. Here’s exactly what you need to know.
Futures trading refers to a method of speculating on the price of assets, including cryptocurrencies, without actually owning them. Like commodity or stock futures, cryptocurrency futures enable traders to bet on a digital currency’s future price. Needless to say, Bitcoin futures are currently the most popular type of crypto futures contracts.
How Does Futures Trading Work?
If you had watched the process of cryptocurrency futures trading on a crypto exchange platform like Bybit, you wouldn’t tell the difference from regular trading. That’s mainly because traders do precisely the same thing in both cases – open long and short positions and implement proper risk management techniques.
However, futures contracts are very different from spot trading because they don’t operate with the underlying assets but only with their price action. Without the actual asset, futures are way more fluid and easier to handle. Also, they enable margin trading with high leverage.
What Is a Futures Contract?
Futures contracts are part of a large category of trading instruments known as derivatives, including— Contracts for Difference (CFDs), Options, and Swaps.
Initially, futures contracts made sense for many commodities, including foods, oil, and metals. However, they soon went beyond their practical reasons to conquer all financial markets, including cryptocurrencies. Today, most commodity price quotes you see on financial portals involve futures, usually with a monthly expiry date.
In a nutshell, a futures contract is nothing else than an agreement between two parties to either buy or sell an asset, such as digital currency, on a predetermined date , at a predetermined price . The contract tracks an underlying asset, be it a commodity, stock, or cryptocurrency. It is basically a form of bet on the future price movement.
For example, if you think that Bitcoin (BTC) will increase in price by the end of the month, you would be interested in opening a long position on the cryptocurrency by buying a Bitcoin futures contract with a monthly expiry date. Otherwise, if you believe Bitcoin’s price will go bullish, you would go long. At the contract’s expiry date, the two parties involved in the trade settle, and the contract closes.
While a futures contract’s condition is to have an expiry date, there is a subcategory of cryptocurrency futures called perpetual contracts. What separate perpetual contracts than the rest is it does not have any expiration. They behave exactly the same as traditional futures but without any expiry and settlement.
The price of a perpetual contract monitors the cryptocurrency spot price and trades very close to it. The primary mechanism making perpetual contracts possible is the funding rate, in which long and shorts make regular payments to each other depending on the market situation.
Types of Cryptocurrency Futures Contracts.
There are several types of futures contracts that crypto traders can choose from. It’s worth mentioning that no single platform provides all of the listed types, so make sure to select the suitable futures exchange.
Standard Futures Contracts.
Regular cryptocurrency futures have all the aspects of a standard futures contract from traditional markets, including expiry and settlement. Chicago-based CME Group and CBOE were the first futures trading exchanges to launch Bitcoin futures contracts back in December 2017. In fact, this was one of many reasons that boosted the BTC price to a record high at the time. Before BTC price reached its all-time-high recently in 2020.
Today, CME provides several Bitcoin futures with different expiry dates, as seen in its Bitcoin Futures Calendar. All contracts are settled in U.S. dollars at the expiry. Elsewhere, CBOE decided to abandon its Bitcoin futures contracts, but it would definitely bring them back soon as the interest in crypto is surging.
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some crypto exchanges do provide standard futures contracts. Like Bybit and binance cryptocurrency exchange
, most of them offer quarterly Bitcoin futures and the contracts commonly dealt with in U.S. dollars. They are often settled every three months and are ideal for swing trading.
Futures with Physical Delivery.
Another type of cryptocurrency futures that also have expiry dates are futures with physical delivery. They were first introduced by Bakkt, приложение binance an entity backed by Intercontinental Exchange (ICE), the parent New York Stock Exchange (NYSE). The only difference from the regular futures described above is that cryptocurrency is actually delivered during the settlement process.
Bakkt now offers only Bitcoin futures with physical delivery, meaning that it transfers Bitcoin at the expiration date to those who bought futures on the cryptocurrency. As a cash-settled futures contract, this approach aims to contribute to the Bitcoin circulation.
Perpetual contracts represent another popular type of cryptocurrency futures. Since it does not rely on the expiration date, perpetual contracts quickly took off on BitMEX, binance margin apžvalga but soon being adopted by major crypto exchanges, including Bybit and binance cryptocurrency exchange
The primary mechanism that helps perpetual contracts keep as close to the spot price as possible is funding. Traders are paying each other based on their open positions at certain hours. The difference between the perpetual contract price and the spot price decides who pays and who gets paid. Thus, when the funding rate is positive, traders who have long positions pay shorts, and when the funding rate is negative, shorts pay longs.
A worthy note for traders on Bybit, the funding payments are carried out every eight hours, and the perpetual contracts are traded in USDT and other stablecoins.
Commodity vs. Crypto Futures: Similarities & Differences.
Bitcoin futures share many similarities with futures contracts from traditional financial markets. In fact, Bitcoin is considered a commodity by the U.S. Commodity Futures Trading Commission (CFTC), so this shouldn’t surprise you.
Futures on both cryptocurrencies and commodities do not involve the underlying assets. But their derivatives and the prices are just a tad different. There are futures from both markets that share similar components, including the expiry date and settlement.
Some cryptocurrency futures, such as perpetual contracts, are different from commodity futures because they don’t have any expiry time and settlement. Plus, crypto futures are generally more volatile than commodity futures, given that digital assets are way more volatile.
Another key difference is that many commodity futures are traded for practical reasons rather than for speculation. For example, factories and transport services would be interested in buying oil at current prices, but they would purchase oil futures with future delivery.
The Benefits of Futures Trading.
Cryptocurrency futures have become very popular and for excellent reasons. Here are some advantages of crypto futures that you should consider:
Convenient. Trading futures is easy even for beginners than trading actual cryptocurrencies, which requires you to access a liquid market and have a secure digital wallet.