What is Futures Trading in crypto? How do they work?

Futures trading crypto has become a familiar term in the cryptocurrency market, attracting the attention of both new and experienced investors. But what exactly is futures trading in crypto and how does it work in this volatile market?

In this article, AZCoin will help you explore the fundamentals of futures trading, why it is becoming increasingly popular and various other aspects.

What is futures trading in crypto?

Futures trading involves agreeing to buy or sell an asset at a predetermined price at a future date. Unlike traditional stock markets, where you trade actual assets (like Bitcoin or Ethereum) at the current market price, futures trading allows you to speculate on the future price of cryptocurrency without needing to own it. This type of trading is often used by investors to hedge against potential risks or to use leverage to increase profits.

Why is futures trading popular in the crypto market?

The cryptocurrency market is known for its high volatility, which brings both opportunities and risks. Futures trading has become popular because it allows traders to take advantage of price fluctuations without needing a large capital upfront.

Additionally, the ability to short-sell in futures trading, meaning betting on the price of cryptocurrency to decrease, offers a unique advantage in a market where prices can drop as sharply as they rise.

The difference between futures trading and spot trading

Futures trading and spot trading are two different approaches to trading cryptocurrencies:

• Spot Trading: This involves buying or selling cryptocurrencies at the current market price, with immediate settlement. You own the actual asset and can hold it in a wallet or on an exchange.
• Futures Trading: In contrast, futures trading involves contracts that obligate you to buy or sell an asset at a predetermined date and price. You don’t own the underlying asset until the contract is executed and your primary goal is to predict price trends rather than owning the cryptocurrency.

These differences highlight the strategic nature of futures trading, where the focus is more on predicting price trends than simply owning cryptocurrency.

How futures trading crypto works

Futures trading in crypto operates through a system of contracts between buyers and sellers. Here’s how it typically works:

• Choosing a Contract: Traders select a futures contract specifying the type of cryptocurrency, the price at which it will be traded and the expiration date.
• Margin Requirement: Unlike spot trading, futures trading usually requires a margin, an initial deposit representing a fraction of the overall contract value. This allows leverage, enabling traders to control larger positions with smaller capital.
• Execution and Settlement: When the contract expires, the trade is settled either through the delivery of the actual asset or cash, depending on the terms.
• Profits and Losses: Traders can close their positions before the contract expires to lock in profits or minimize losses. Profits and losses are determined by the difference between the contract price and the market price at the time of closing the position.

Benefits and drawbacks of futures trading in crypto

Benefits

Futures trading offers several advantages in the crypto market:

• High Leverage: Futures trading allows investors to use leverage, meaning they can control a large position with a small amount of capital. This helps maximize profits from small price movements.
• Short Selling: Investors can bet on the price of cryptocurrency going down, enabling them to profit in both rising and falling markets.
• Hedging: Futures trading allows investors to hedge their portfolios by opening opposite positions in the futures market, helping to mitigate potential losses.
• High Liquidity: Futures trading platforms typically have high liquidity, making it easy for investors to enter and exit positions without significantly affecting prices.
• Flexibility: Futures trading offers various contract types, allowing investors to choose strategies that align with their goals.

Drawbacks

Despite its many benefits, futures trading in crypto also comes with its challenges:

• High Risk: Using leverage can amplify both profits and losses, leading to rapid capital loss if the market moves against the investor’s prediction.
• Complexity: Futures trading requires extensive knowledge of the market, risk management and trading strategies, making it less accessible for beginners.
• Margin Calls: When the market moves unfavorably, investors may need to add more funds to their margin account to maintain their position, risking greater losses.
• Time-Limited: Futures contracts have expiration dates, requiring investors to regularly monitor and adjust their positions to avoid losses when the contract expires.
• Trading Psychology: The stress and pressure from short-term price fluctuations and the need to constantly manage positions can impact an investor’s psychology and decision-making.

Popular futures trading platforms

Many platforms offer futures trading in cryptocurrencies. You can refer to the list of the best crypto exchanges 2024 here or specifically consider:

Binance

Binance is one of the largest cryptocurrency exchanges globally, offering various futures contracts with leverage up to 125x. This platform is highly regarded for its user-friendly interface, high liquidity and competitive trading fees. Binance also supports numerous futures trading pairs, including popular cryptocurrencies like Bitcoin, Ethereum and many altcoins.

Bybit

Bybit is a popular futures trading platform among professional traders, offering leverage up to 100x. Bybit stands out for its high liquidity, low trading fees and a fast and stable trading system. The platform also supports technical analysis tools and has an easy-to-use interface.

BitMEX

BitMEX is one of the first futures trading exchanges and continues to hold a significant position in the industry. The platform is known for its perpetual contracts and supports leverage up to 100x. BitMEX primarily targets professional traders with robust security features and trading tools.

FTX

FTX is a relatively new futures trading exchange but has quickly become one of the most popular platforms. FTX offers a wide range of diverse futures products, including futures contracts for traditional assets and tokenized stocks. The platform also supports leverage up to 101x and provides advanced trading tools with low fees.

OKX

OKX is another well-known futures trading exchange in the cryptocurrency community. This platform offers various futures and perpetual contracts with leverage up to 125x. OKX is noted for its high liquidity, effective risk management tools and support for multiple trading pairs.

How to get started with futures trading crypto

To start with futures trading in crypto:

• Choose a Platform: Select a reputable exchange that offers futures trading.
• Create an Account: Register and complete the necessary verification procedures.
• Fund Your Account: Add funds to your trading account to meet margin requirements.
• Choose a Contract: Select a futures contract that aligns with your market predictions.
• Execute the Trade: Decide whether to take a long or short position based on your analysis.
• Monitor Your Position: Track the market and manage your position wisely.

The future of futures trading in the crypto market

The future of futures trading in the cryptocurrency market is promising. As more institutional investors enter this space, the demand for sophisticated trading tools like futures is expected to increase.

Additionally, advances in blockchain technology and decentralized finance (DeFi) may introduce new forms of futures contracts and trading platforms, further expanding the market.

Conclusion

In summary, futures trading in crypto offers a dynamic and potentially lucrative way to engage in the cryptocurrency market. AZcoin hopes this article has provided you with an overview of this term and helps you make informed investment decisions!