What is cryptocurrency futures? What is the difference between cryptocurrency futures contracts and spot transactions? Cryptocurrency is a kind of transaction medium that uses cryptography principles to ensure transaction security and control the creation of transaction units. It belongs to digital currency (or virtual currency). Cryptocurrency is based on decentralized consensus mechanism and is opposite to the banking and financial system that relies on centralized supervision system. The most typical cryptocurrency is Bitcoin (the first decentralized cryptocurrency), which was born in 2009. So what is cryptocurrency futures? Now let's get to know.
Cryptocurrency futures is a financial contract that allows both parties to agree to buy or sell cryptocurrency at a future date and price. Futures can be used to avoid risks or speculate on the price trend of cryptocurrency without owning the asset itself.
Crypto futures are usually traded on margin, which means that both parties must provide collateral. Such collateral may be in the form of cash, cryptocurrency or other assets. The value of collateral is often much higher than the value of the contract itself.
For example, a futures contract worth $10000 in Bitcoin may require $100000 in collateral. This high level of collateral is necessary because the price of cryptocurrency is very volatile and may fluctuate rapidly. When one party to the contract purchases or sells the underlying asset (in this case, Bitcoin), they must provide additional collateral to cover their position. If the price is unfavorable to them and they cannot provide more collateral, their positions will be liquidated and they will suffer losses.
Some exchanges provide insurance products to prevent losses caused by price changes, but these products are not available in all exchanges and may not cover all types of losses. In order to trade cryptocurrency futures, investors must have an account with the broker that provides these products. Brokers typically charge a commission on each transaction and a daily fee for overnight positions. Some brokers also charge a currency conversion fee if the account is denominated in a currency other than US dollars.
Cryptocurrency futures can be traded on spot and margin exchanges. Local exchanges allow investors to buy and sell cryptocurrencies at current prices, while margin exchanges allow investors to leverage trading.
Leverage can amplify gains and losses, so it should be used with caution. Generally speaking, cryptocurrency futures are suitable for investors with sufficient capital to adapt to volatile markets and deal with potential losses.
Bitcoin futures is the most popular type of crypto futures contract, which was first introduced by the Chicago Mercantile Exchange (CME) in December 2017. Since then, various other exchanges have introduced cryptocurrency futures, including the Chicago Board Options Exchange (CBOE) and the Tokyo Stock Exchange (TSE).
Bitcoin futures allow investors to take advantage of transparency, price discovery and risk management capabilities, while also providing a safety net for any direct exposure. If you want to have more control over your investment, rather than just buying coins on the exchange or gambling through the sharp fluctuations in the price of cryptocurrencies, this is the perfect choice.
For example, if you expect the price of Bitcoin to rise in the future, you can buy a Bitcoin futures contract. If the price of Bitcoin rises as you expect, you will benefit from the contract. If the price falls, you will lose money. Some cryptocurrency exchanges offer futures contracts for trading.
These contracts can be leveraged, which means you can invest a small amount of money to control a larger amount of underlying assets. This will magnify your gains or losses. Therefore, trading futures is a more advanced trading strategy, which is not suitable for everyone.
Know your exchange. Not all exchanges provide the same products or services, so it is important to do your research and choose exchanges that meet your needs.
Consider your risk appetite. Futures trading is not suitable for everyone. It is important to understand the risks before investing any funds.
Have a plan. Before starting any transaction, it is essential to have a clear plan. Try to have a clear understanding of why you enter this industry and your exit strategy.
Be patient. Many new futures traders become impatient and try to force them to trade, but this is often the cause of disaster. When trading futures, it is important to wait for the right time and patience.
Manage your risk. The most important aspect of futures trading is risk management. Be sure to set a stop loss profit and do not overuse your position. If you can master these five things, you can make a profit in Bitcoin futures trading.
Crypto futures do not trade with any underlying assets, but with their price behavior. Therefore, they are ideal for the encryption market because they are usually fast paced and fixed every day. Because this asset type is highly unstable and liquid, it is very effective in the encryption field, which means a lot of mobility and potential profits. Crypto futures enable margin trading with high leverage.
In addition, crypto futures are traded in more centralized crypto exchanges, rather than decentralized exchanges (Dex) such as UniSwap or SushiSwap.
Cryptocurrency futures contracts have different shapes and sizes, each with its own unique benefits and risks.
The most common type of contract is the standard futures contract, which is a legally binding agreement to purchase or sell a certain amount of cryptocurrency at a specified price on a specified date in the future. These contracts are standardized to ensure fairness. Traders can use them to speculate on the future price of cryptocurrency, hedge price risk, and even lock the physical delivery price of cryptocurrency.
However, standard futures contracts are accompanied by the risk of having to carry out or accept the delivery of the underlying assets, and the possibility of having to pay or collect futures margin if the price change is not conducive to the traders' positions.
Another type of cryptocurrency futures contract is physical delivery contract. These contracts are similar to standard futures contracts, but they are settled with the actual delivery of cryptocurrency rather than cash. This type of contract is usually used by dealers who wish to make physical delivery of the underlying assets, for example when purchasing cryptocurrency for long-term investment purposes. However, these contracts are also accompanied by certain risks, such as counterparty risk and storage risk.
Finally, there is the permanent contract, which is a cryptocurrency futures without a fixed delivery date. Instead, these contracts will be extended permanently and settled daily. Traders who want to speculate on short-term price changes or hedge against volatility risk often use permanent contracts.
However, since these contracts do not have a fixed maturity date, if the price fluctuates significantly relative to the trading position, they may be affected by large market value fluctuations. Therefore, permanent contracts are considered to be relatively high-risk instruments and are not suitable for all investors.
Cryptographic permanent contracts have been adopted by major crypto exchanges, including Phemex, which provides BTC permanent contracts and USD permanent contracts.
Crypto futures are not as common as crypto futures. This is because cryptocurrency transactions (as well as fiat currency transactions) are relatively simple transactions, and few factors need to be considered, mainly price, time, coins or tokens. This means that there is no need to personalize the contract, so there is no reason to assume the additional counterparty risk inherent in crypto forward private trading.
Both forward contracts and futures contracts are derivative instruments that allow market participants to offset or hedge the risk of asset price changes over time. In addition, they allow traders to participate in trading by betting on the price direction without having to invest any capital first. Although both forward contracts and futures contracts involve the purchase or sale of assets at a future date, there are some key differences between the two.
Security of contract performance: A futures contract is a regulated and legally binding agreement that purchases or sells standardized assets on a specific date or month, which is perfect for traders seeking security of contract performance. As a private over-the-counter transaction contract between related parties, forward contracts cannot provide the same security.
Customized contract: Forward contract allows personalization, which is an ideal choice for those traders who want to include multiple components. For example, counterparts could take into account changes in the cost of materials and food for agricultural products, or they could agree on specific terms of payment (for example, to pay the full deposit at the end of a predetermined final date). However, futures contracts are standardized, which means less flexibility.
Early exit: although the forward contract agreed by the independent party can be terminated in advance according to the agreement of both parties, this is not common. On the other hand, futures contracts are terminated early in most cases. This allows traders to reduce losses when prices are against them and quickly move to the next futures contract to seek profits - many futures contracts are only valid from one day to the next (from market to market).
In general, the above content introduces in detail what cryptocurrency futures are and the difference between cryptocurrency futures contracts and spot transactions. I believe you will understand it after reading it. In a word, there are several things you should consider before you start to try futures trading. First of all, futures contracts are complex financial instruments that may have risks. Before you start trading, it is important to do your homework and understand how the system works. Second, you need a lot of capital. Futures contracts are highly leveraged, which means you can control a large number of positions with relatively little money. However, it also means that if the market goes against you, losses will increase rapidly. Finally, remember that the futures market is open 24 hours a day, so you need to be ready to monitor your positions. Taking these factors into account, you can give yourself a better chance of success in the futures market.