The cryptocurrency market has reached a large audience over the last few years. We know that it is now possible to trade a wide range of assets in the cryptocurrency market in just a few simple clicks. This is why we have also seen the creation of cryptocurrency derivatives, that include cryptocurrency futures.
There are many types of derivatives in the cryptocurrency industry, but futures are some of the most used ones. Therefore, it is now possible for traders and investors to create their strategies in the best possible way by including not only crypto derivatives but futures in their portfolios.
In the next sections, the goal is to share with you all the details about cryptocurrency futures and how you can use them in your daily trading activities. There are many different things that you can do with futures that we will share with you in the next section of this post.
Disclaimer: the information shared by AltSignals and its writers should not be considered financial advice. This is for educational purposes only. We are not responsible for any investment decision you make after reading this post. Never invest more than what you are able to lose. Always contact your professional financial advisor.
Starting from the basics is always a good thing to do. This is why we will focus on what derivatives are and how they work. We will apply this knowledge to cryptocurrencies in order to get a clear idea of crypto derivatives as a whole.
Derivatives make reference to financial contracts that have their value derived from the price of an underlying asset. For example, a cryptocurrency derivative will be a contract created based on the price or value of digital assets such as Bitcoin (BTC), Ethereum (ETH) or Litecoin (LTC), among others.
Derivatives are contracts that can be signed by two or more parties and, as mentioned before, have their value derived from an underlying financial asset. There are different types of derivatives in the market that investors can trade right now. Some of these derivatives include futures, options and perpetual contracts, among others.
The cryptocurrency market has also seen the expansion of these types of contracts, that can now be traded in many different cryptocurrency exchanges. There are other types of contracts that investors might also find useful, including swaps, warrants and even forward contracts, among others. However, these ones are not very popular in the cryptocurrency market.
Derivatives are used in order to make it easier for investors to hedge risk or gain extra exposure on different assets. Furthermore, derivatives have been used over the last years for investors to make their trading activities more complex and reach the results they were expecting.
These advanced trading tools can be used by traders in order to execute their trades, hedge against possible price fluctuations or gain exposure to specific assets and market moves.
Cryptocurrency futures are derivatives that are linked to digital currencies and that derive their value from them. There are many virtual currencies that could be used in order to trade derivatives and futures, specifically. Most of the time, Bitcoin, Ethereum and Litecoin are the digital assets with the highest volumes when it comes to cryptocurrency futures, but there are also other smaller coins that can be traded like futures.
Futures are some of the most popular derivative financial contracts currently available in the market, and not only for cryptocurrency traders. But how do cryptocurrency futures work?
Futures contracts are simple investment tools that let investors get access to advanced trading strategies when it comes to different financial tools. Cryptocurrency futures contracts will be linked to digital currencies.
Futures contracts are obligations to buy or sell an asset at a pre-determined future date in the market and for a specific price. This is one of the best ways to hedge against possible volatility in the market. Most of the time, these futures contracts are used in the commodities market in order to get a price that has been guaranteed for the future. In periods of high volatility, futures provide stability and predictability.
As you can see, cryptocurrency futures could be used in order to get access to Bitcoin or other virtual currency in the future, for a cheaper price than the market price at which BTC or the underlying asset is being traded at maturity. Moreover, it could also be a great opportunity for an investor to sell an asset at a higher price if they consider that the future price of the underlying asset is going to be lower.
Futures can be cash-settled or settled with the underlying asset. Therefore, there are different types of contracts that would change and depend on the crypto exchange that you use and the needs of each of the traders involved in the contract.
It is possible to find futures contracts for 3 or 4 months in the cryptocurrency market. But there are other timeframes that could be used by traders, depending on their needs. Thanks to the expansion of futures contracts, the cryptocurrency market became a more mature place for investors to trade and execute their strategies.
But how to trade cryptocurrency futures in the market? At the moment, there are some platforms that are allowing investors to trade cryptocurrency futures directly from their homes. In the past, when investors wanted to trade cryptocurrency futures, they had to go through brokers that were operating specific markets and call them to be able to execute trades.
Nowadays, most cryptocurrency exchanges are offering investors the possibility to trade cryptocurrency futures. One of the exchanges with the largest trading volume for futures and with one of the best services in the market to trade digital assets is Binance.
Binance is among the best options if you want to trade cryptocurrency futures. The platform has been working for many years in the crypto market and they have released a wide range of other services for clients from all over the world.
However, there are other cryptocurrency exchanges that are allowing users to trade virtual currencies and futures. Everything depends on the type of trader you are and your needs. Usually, it is good to search for recognized and large crypto trading platforms that are usually the most efficient and reliable.
We also need to discuss the positive and negative aspects of cryptocurrency futures. This would allow us to have a better idea of whether these are trading tools that we can use or that do not fit our trading strategies. This is a list that will help you identify some of the positive and negative aspects of using cryptocurrency futures.
As you can see from the pros and cons list that we shared with you in the previous section, there are some positive and negative aspects of using and trading cryptocurrency futures. One of the risks is related to leverage. You don’t want to use leverage if you don't have enough margin.
Positions can get abruptly closed if you do not have enough margin to sustain the trade. This happens because the market is very volatile and the margin is small. You should always control your position in order to avoid being liquidated. But you can also trade without leverage so as to reduce even further the risk of using crypto futures.
Another thing that you should take into consideration is that cryptocurrencies are very volatile. If you are using futures to speculate on the future price of an asset (going long or short), you could get a bitter surprise when you see that the market tanked or that it went higher.
We have seen over the last few years how many investors were not able to predict Bitcoin or the market behaviour and ended up with large losses when trading futures. This does not mean, however, that they are always risky. Using futures as a hedge in a reliable trading strategy could be a very good idea.
You should make sure that you have a reliable strategy in place in order to avoid possible issues while trading cryptocurrency futures. That means that you need to be prepared at all times to have an exit strategy and think about a contingency plan.
There are also other ways in which you can reduce your risk when trading cryptocurrency futures, including reducing your leverage exposure and having an exit plan in case things turn ugly in the market.
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