Crypto Futures Trading Explained

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Cryptocurrency traders use several strategies while making trades. Different people will benefit from different strategies since they all work somewhat differently. Although certain crypto investment tactics, like spot trading, have gained widespread adoption, others, like futures trading, are used by far smaller levels of the industry.

Trading bitcoin futures is similar to trading futures on conventional financial markets. Futures contracts, binding legal agreements to buy or sell an asset at a defined price at some time in the future, must be used.

A futures contract is an agreement to buy a given cryptocurrency at a specified price at some point in the future, no matter the price at which the cryptocurrency is trading.

The time frame may range from a single day to several decades. Futures trading is sometimes compared to gambling since it is based on the predicted value of an item.

See also: What is Ethereum the Merge?

Can You Explain the Mechanics of Crypto Futures Trading?

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Futures traders frequently do little more than make educated guesses about the future value of a bitcoin asset. The basis for their prediction of the asset’s behavior on a particular day might be either fundamental analysis applied to a set of measures, technical analysis, or often a mix of the two.

A trader, for instance, may open a short position in Bitcoin futures on October 23, 2022, by purchasing a contract to sell Bitcoin at a certain price. Assuming the price is met, the trader will sell Bitcoin to you. To show intent to complete the transaction, one must open a long position on the contract.

If two parties agree on a price of $30,000 per bitcoin, but the market price is now $23,000, the seller will earn a profit, and the buyer will lose money if the price of bitcoin stays below $30,000. Assuming a fee of $23,000 would mean that one bitcoin would cost you $4,500.

See also: Understanding Decentralized Exchanges; Beginner’s Guide.

Alternatively, if the price is $45,000 on October 23, they will have lost money, and the buyer will have won the deal. Premature termination of a futures contract may only be accomplished by entering into a counter-transaction. When the contract’s completion deadline finally arrives, both parties must legally fulfill their obligations.

Sometimes, futures traders may borrow funds from the exchanges they use to trade to increase the size of their trades and, thus, their potential profits. Leverage is defined as the ratio of the final transaction size to the original deal size. If you make a deal worth X, the leverage maybe 10, 20, 50, or even 100 times that amount, depending on the market.

Never forget that raising the size of a contract by borrowing money might backfire if the trade does not go in your favor. It’s high stakes bet that might end in disaster if you’re forced to liquidate and lose all of your money.

Other Forms of Crypto Trading vs. Crypto Futures Trading

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Futures contracts trading is apart from other types of trading in several crucial respects. Futures and spot trading (also known as peer-to-peer crypto) deal with a single underlying asset. However, the former involves the exchange of one asset (or currency) for the latter, while the latter does not. Another distinguishing feature is that, unlike direct bitcoin trading, the parties involved in the transaction are not the market itself but buyers and sellers.

Futures trading is unique from other types of financial speculation since it is not conducted in real-time, and the price is not based on the item’s current value. Instead, it is figured out by projecting forward to what the cost may be. The speculator does not need direct access to the coin he is betting on.

See also: The Best NFT Marketplaces in 2022

Is OTC Crypto Trading Right for You?

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Futures trading does not need the actual transfer of goods but is based on guesswork on the future value of a commodity. To succeed, you need to have a firm grasp of the market fundamentals as a whole and those concerning the asset at hand.

This is commonly used with technical analysis to get a reasonably accurate forecast of an asset’s future performance. While no trader can guarantee a profit in every future deal, this knowledge might significantly increase your chances of making a profit.

Therefore, futures trading is best left to seasoned market veterans who have been immersed in the industry for some time and can reliably predict how prices will move. Avoid futures trading despite its allure if you lack substantial knowledge in the field.

See also: Pancake Swap for Beginners.

Just So We’re Clear

Futures trading in cryptocurrencies is risky, but it may pay off handsomely if you play your cards well. Leverage perfectly illustrates this principle since it increases both your potential gains and losses. Given the tremendous volatility of the bitcoin market, this is a particularly pressing problem.

A futures market will not give you money to leverage your transaction unless you first put up a specified amount of money, called initial margin, as collateral in case you lose money on the trade. The trading platform stores this for you and will only release it if you end up with a positive result in the deal and can pay back the borrowed funds.

When you make a loss in the transaction, the exchange will promptly cancel the contract and liquidate your position. If this happens, the initial margin money you put up will be gone for good. This is why beginners should avoid leveraged trading.

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