Crypto Futures Trading: An In-Depth Overview

Trading Made Easy 2023-09-30 07:44:40

Cryptocurrency enthusiasts have numerous avenues to engage with digital assets, and among these, futures trading stands out as a highly popular and accessible option. This guide aims to provide you with a comprehensive understanding of the intricacies of futures trading, highlighting its advantages over spot and options trading. You'll gain insights into opening both long and short positions across various digital currencies, equipping you with the essential knowledge required for successful participation in this dynamic market.

What is Futures Trading?

Futures trading is a method of speculating on asset prices, including cryptocurrencies, without the need to possess the underlying assets themselves. Analogous to traditional commodity or stock futures, cryptocurrency futures empower traders to make speculative wagers on the future value of digital currencies. It's worth noting that Bitcoin futures presently dominate the landscape as the most widely traded type of crypto futures contract.


How Does Futures Trading Operate?

Observing the process of cryptocurrency futures trading on platforms like BingX closely, one would discern minimal disparities from regular trading practices. This similarity arises because traders execute similar actions in both scenarios, such as opening long and short positions and implementing sound risk management strategies.


Nonetheless, futures contracts significantly deviate from spot trading by functioning exclusively based on asset price movements, without direct involvement with the underlying assets. This detachment renders futures trading more flexible and manageable, allowing for margin trading with substantial leverage—an attribute that sets it apart from traditional spot trading.

Understanding Futures Contracts

Futures contracts fall under the vast umbrella of trading tools termed as derivatives. This group also encompasses Contracts for Difference (CFDs), Options, and Swaps.


Historically, futures contracts were primarily associated with commodities like food, oil, and metals. But with time, their scope expanded, enveloping all financial markets, including the realm of cryptocurrencies. Now, when you glance at commodity prices on financial websites, you're often looking at futures, typically set with a monthly expiration.


At its core, a futures contract is a pact between two entities to buy or sell an asset, such as a cryptocurrency, at a specified price on a set date. This contract mirrors an underlying asset, whether it's a commodity, stock, or digital currency. Think of it as a wager on where the price will head next.


For instance, if you're optimistic about Bitcoin (BTC) rising in value by month's end, you'd lean towards initiating a long position on it by purchasing a Bitcoin futures contract set to expire monthly. Conversely, if you're bullish about Bitcoin's trajectory, you'd also go long. When the contract reaches its expiration, both trading parties settle, concluding the contract.


Though most futures contracts come with an expiration date, there's a unique subset in the cryptocurrency world: perpetual contracts. The distinguishing feature of these contracts is their lack of an expiration date. They function similarly to conventional futures but without any set end or settlement. 


A perpetual contract's price closely mirrors the immediate cryptocurrency price. The engine driving these contracts is the funding rate, where long and short traders periodically compensate each other based on the market's pulse.

Exploring Cryptocurrency Futures Contracts

Cryptocurrency futures contracts come in various forms, catering to different trading needs. However, it's essential to note that not all platforms offer every type of contract. So, it's crucial to pick the right futures exchange for your needs.


  1. Standard Futures Contracts

Standard crypto futures mirror the characteristics of traditional futures contracts, complete with expiration and settlement. The CME Group and CBOE, both based in Chicago, pioneered Bitcoin futures contracts in December 2017. This move was a significant factor propelling BTC's price to unprecedented heights, until it shattered its previous record by hitting $20,000 in 2020.


Currently, CME offers an array of Bitcoin futures with varying expiration dates, as detailed in its Bitcoin Futures Calendar. All contracts are settled in U.S. dollars upon expiration. Meanwhile, CBOE has paused its Bitcoin futures offerings but is likely to reintroduce them given the escalating interest in cryptocurrencies.


Several crypto exchanges, including BingX and Binance, offer standard futures contracts. Most provide quarterly Bitcoin futures, typically settled in U.S. dollars and ideal for swing trading.


  1. Futures with Physical Delivery

Futures with physical delivery, another variant of cryptocurrency futures, were first launched by Bakkt, supported by the Intercontinental Exchange (ICE), the NYSE's parent company. The unique feature here is the actual delivery of the cryptocurrency during the settlement process.


Bakkt currently offers Bitcoin futures that involve the physical transfer of Bitcoin to those who've purchased the futures upon expiration. This method aims to enhance Bitcoin's circulation in the market.


  1. Perpetual Contracts

Perpetual contracts have gained immense popularity in the crypto futures landscape. These contracts, devoid of an expiration date, were initially popularized by BitMEX and subsequently embraced by leading exchanges like BingX and Binance.


The key mechanism ensuring perpetual contracts remain close to the spot price is the funding rate. Traders compensate each other based on their positions at specific intervals. The gap between the perpetual contract price and the spot price determines the payer and payee. When the funding rate is positive, long position holders pay those with short positions, and vice versa.


For traders on BingX, it's worth noting that funding transactions occur every eight hours, with perpetual contracts traded in USDT and other stablecoins.


The crypto perpetual futures market has seen significant growth, but there's potential for even more, especially when compared to traditional futures exchanges.


Despite the considerable dip in crypto values in 2022, perpetual futures trading volume has seen a decline, but not as drastically. Data from coinglass indicates that the average futures volume hovers between $50 billion to $200 billion.


The future of crypto futures is promising, with fierce competition expected among top exchanges and decentralized platforms.

Commodity vs. Crypto Futures: A Comparative Analysis

Bitcoin futures, while a relatively new entrant, bear a striking resemblance to futures contracts from the established financial markets. Given that the U.S. Commodity Futures Trading Commission (CFTC) classifies Bitcoin as a commodity, these parallels shouldn't be unexpected.


Shared Traits

  1. Asset-Price Linkage: Both cryptocurrency and commodity futures are tethered not to the actual assets but to their prices. Typically, the prices of these derivatives closely mirror those of the underlying assets.
  2. Contract Components: Futures from both realms often have common elements, such as expiration dates and settlement procedures.


Contrasting Features

  1. Perpetual Contracts: Unique to the crypto world, perpetual contracts stand out from traditional commodity futures. They lack a defined expiration and settlement period.
  2. Volatility Levels: Crypto futures tend to exhibit higher volatility compared to their commodity counterparts. This is primarily because digital assets themselves are inherently more volatile.
  3. Purpose of Trade: Many commodity futures are procured for practical applications rather than mere speculation. For instance, manufacturing units and transportation services might buy oil futures for future delivery, aiming to lock in current prices, rather than just speculating on price movements.

Futures vs. Options: Distinguishing the Two

Bitcoin futures are tradable on BingX, but they serve different purposes and cater to distinct trading needs.


Futures Contracts:

  1. Utility for Speculators and Real-World Users: While futures contracts are a favorite among speculative traders, they also offer tangible benefits to those who deal directly with the underlying assets. These contracts provide a means to mitigate the uncertainties and risks arising from unpredictable market shifts and volatility.
  2. Bitcoin Miners' Scenario: Consider Bitcoin miners. Their revenue stems from the Bitcoin they extract and subsequently sell. Yet, the value of Bitcoin can swing dramatically, while their operational costs remain relatively stable and are often settled in fiat currency. If Bitcoin's price takes a nosedive, miners could find it challenging to cover their fixed expenses, endangering their operations. To counteract this vulnerability, miners can engage in futures contracts, securing future buyers for their Bitcoin at rates that ensure their operations remain viable.


Options Contracts:

Options are typically more appealing to speculative traders. Their structure inherently limits potential losses, making them a safer bet for those looking to speculate on price movements without exposing themselves to significant downside risks.

Understanding the Pros and Pitfalls of Futures Trading in Cryptocurrency

Cryptocurrency futures have surged in popularity, and it's easy to see why. Let's delve into the advantages and potential risks associated with crypto futures trading:


Advantages of Crypto Futures Trading

  1. Ease of Use: Futures trading is often more straightforward for newcomers compared to trading actual cryptocurrencies. The latter demands access to a liquid market and a secure digital wallet. This simplicity is evident in the trading volumes of crypto futures, which often outpace spot trading volumes by two to three times.
  2. Amplified Profits: Leveraged trading in crypto futures can yield significant returns. Platforms like BingX allow for leverage up to 100x, enabling you to initiate a $1,000 position with just $10. However, it's crucial to remember that while potential gains are magnified, so are potential losses.
  3. Diverse Trading Strategies: Crypto futures offer a more conducive environment for various trading strategies, especially intra-day trading, compared to direct cryptocurrency trading. They also provide the flexibility to short sell without restrictions, granting traders more avenues to optimize profits.
  4. Absence of Funding Rate: A notable distinction between futures and perpetual futures is the lack of a funding rate in the former. Often, futures prices are in contango, where future prices surpass current spot prices. This discrepancy paves the way for 'cash and carry arbitrage' – a market-neutral strategy that pairs a long position in the spot market with a short position in futures. As futures prices align with spot market prices on the settlement day, this strategy can yield consistent returns, irrespective of market conditions or volatility.


Potential Pitfalls of Crypto Futures Trading

  1. Market Maturity Concerns: Some experts argue that the foundational crypto market isn't sufficiently mature to support a futures market. They caution that Bitcoin's volatility might ripple through the futures market.
  2. Security and Stability: While no major incidents have been reported on crypto futures platforms, which are generally less susceptible to hacking than traditional crypto exchanges, it's essential to choose platforms wisely. BingX, for instance, offers a seamless and secure trading experience.
  3. Navigating Risks: The crypto futures market is not without its challenges. Traders must be wary of market volatility, the non-stop nature of the market, the potential pitfalls of directly transplanting futures trading strategies from traditional markets, and the allure of excessive leverage, especially for novices.

Key Considerations in Futures Trading

Futures trading, though similar, is distinct from regular trading. Here are some pivotal elements to ponder:


  1. Leverage and Margin Trading:

Leverage magnifies potential returns but equally elevates risks. For instance, while most platforms offer 50x leverage, BingX gives up to 100x, and Binance provides a whopping 125x. High leverage boosts potential returns but can also liquidate positions rapidly. It's pivotal to choose your leverage wisely. A 10x leverage, for instance, uses 10% of a trader's funds, borrowing the rest, either from the exchange or other traders.


  1. Liquidity:

Liquidity assesses an asset's stability and its ability to be swiftly converted to cash with minimal price impact. Three liquidity metrics matter in futures: asset, exchange, and market liquidity. Generally, futures markets, especially in crypto, exhibit higher liquidity than spot markets due to cash settlements, which reduces price slippage risks.


  1. Hedging:

Crypto futures offer a hedge against potential steep drops in cryptocurrency or traditional assets. For instance, Bitcoin futures safeguard against massive Bitcoin price dives in the spot market since the futures price is pre-set for its expiry.


  1. Diversification:

Diversifying across crypto futures, like Bitcoin, Ethereum, and Chainlink, reduces risks tied to a single asset's unforeseen price drop.


  1. Market Volatility:

Cryptocurrencies are renowned for their volatility. Though this presents potential risks, it also opens doors for short-term trading opportunities.


  1. Expiration Date:

For regular cryptocurrency futures that settle in cash, the expiration date is crucial as it's the day the contract settles. Traders, however, can exit their contracts anytime before this date.

Getting Started with Crypto Futures Trading

  1. Allocate Funds: Only commit what you're prepared to lose.
  2. Invest Time: Approach crypto futures trading earnestly, not as a mere pastime.
  3. Practice with a Demo: Begin with virtual trading on platforms like BingX demo account.
  4. Pick the Right Platform: Opt for renowned exchanges, especially as a novice, and always commence with modest trades.


Remember, trading perpetual contracts might necessitate periodic payments. And, if using leverage, always monitor the position margin to avoid unwanted liquidations.


Who is It For?

Anyone keen on cryptocurrency can venture into futures trading. It's ideal for those seeking crypto exposure without the hassle of securing digital wallets.


Profit Potential in Crypto Futures Trading

When well-managed, crypto futures trading can yield substantial profits, sometimes even surpassing Bitcoin mining profits. However, the risks remain substantial.


Crypto futures attract both institutional and retail traders due to their inherent advantages and decreased hacking threats compared to spot markets. While they overshadow crypto options currently, both derivatives offer unique trading experiences and potentially higher returns than traditional trading.

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