Futures in Crypto Financial markets provide opportunities for individuals to profit through understanding their workings and the factors that influence them. One popular financial instrument used globally is futures trading, which is both ancient and complex, as well as high-risk. The name “futures” suggests a connection to future asset prices.
The underlying assets for futures trading can be any valuable item that fluctuates in value, such as gold, precious metals, gas, oil, and other commodities. Futures trading involves predicting the future value of these underlying assets or commodities.
Traders use market analysis to make predictions about the future value of an asset, such as gas, and enter into agreements to purchase or sell it at a specific price on a future date.
Futures trading has also been adopted in the cryptocurrency market, which is known for its high volatility and instability. Despite the potential for profit, trading digital coins is not simple and requires significant effort.
Let’s see what are futures in crypto in more detail.
What are Cryptocurrency Futures?
As previously mentioned, trading in crypto futures requires significant research and preparation. It can be challenging to predict the future value of cryptocurrencies, and it takes a significant amount of time to analyze and make a conclusion.
Here are the types of research done before to trade crypto futures:
Technical research is a detailed analysis of a coin and its underlying project, with a focus on its price. Price chart analysis allows investors to understand how the asset reacts to market trends and identify historical indicators and patterns. By studying these historical data, investors can gain insight into the coin’s potential future behavior, which serves as a foundation for price forecasting.
Fundamental analysis looks at the external factors that may affect the cryptocurrency market. The market does not exist in a vacuum and is affected by events in the broader economy. For example, a global war that began in 2022 had a significant impact on the world economy and the crypto industry, causing a market crash in the spring of 2022. To be successful in crypto futures trading, it is important to be well-informed and able to assess the broader economic situation and draw conclusions.
Quantitative analysis combines fundamental and technical research and uses calculations to aid in decision making for trading positions. In essence, crypto futures trading involves entering into agreements to buy or sell cryptocurrencies based on predictions of their future price. While this financial instrument has its benefits and drawbacks, which will be discussed in more detail later.
Pros and Cons of crypto futures trading
Crypto futures trading offers several benefits, including:
- Not requiring immediate purchase of crypto coins, as trading is based on agreements for future transactions.
- The ability to enter trades with a more favorable position by using leverage, even with a smaller amount of investment capital.
- The potential for fast profits through speculation on crypto values, due to their volatility.
- High liquidity, especially when trading large-cap digital assets that are in high demand.
- The ability to manage risk by choosing a leverage ratio. Low leverage means lower risk.
The downsides of forward contracts include:
- High risk due to uncertainty about future coin price movements, especially in a volatile market.
- Obligations to buy or sell coins must be fulfilled by the expiration date of the contract.
It’s worth noting that crypto futures trading also has its own set of risks and drawbacks, but it’s a widely used financial instrument in the crypto world, and it’s important to understand how it works in practice.
How Crypto Futures Trading Works?
Because crypto futures trading carries a high level of risk, it can be challenging for experienced investors to make decisions when the asset price deviates from their predictions. Having a well-defined strategy can help to maintain consistency and make the right decisions in unexpected situations.
Some of the most commonly used methods in crypto futures trading include:
- Trading long or short
- Trading within a range
To be successful in crypto futures trading, it is important to understand and apply these strategies effectively.
Long and Short
This method involves the investor deciding whether they believe the coin’s value will increase or decrease, and taking a corresponding position.
For example, if an investor believes that the value of a coin will increase in the next couple of months, they can open a position to sell the asset at a higher price. They would specify the price they expect the coin to reach, as well as the expiration date when they would be obligated to sell the coins. If their prediction is correct and the coin’s value does increase, they would be able to sell the coins at a higher price and make a profit.
On the other hand, if an investor believes that the market is about to decline, they can take advantage of this by selling their coins at a relatively high price, and then opening a short position. They would again specify the expiration date and value. When the expiration date arrives, they check the coin’s price. If the price has dropped to the level they stated in the agreement, they can buy back the coins at a lower price, resulting in a profit from the initial coin sale and still having the coins in their possession. This way they can make double profit.
When analyzing crypto charts, you may notice lines of support and resistance. These lines are created as the coin’s value fluctuates, moving above and below these levels and then returning in the opposite direction. The resistance line is the level at which the coin’s value has difficulty breaking through, while the support line is the level at which the price has difficulty falling below, indicating that it is unlikely to drop lower than this level.
As the price is decreasing, it may reach a support level and temporarily fall below it, before returning to the previous support level, forming a pullback. This can be seen as an indication for the investor to open a short position (meaning they expect the price to continue to drop).
Finally, it’s important to select a reputable crypto exchange that supports crypto futures trading. While many large exchanges offer this option, they each have their own terms and conditions, including leverage ratios, penalties, and procedures for liquidating positions when a trader’s prediction about the asset’s price is incorrect. It’s important to research and compare different exchanges before deciding on one.
We recommend using WhiteBIT exchange for buying cryptocurrency, as it is a safe and liquid exchange with a large reserve of funds. WhiteBIT offers perpetual futures contracts with high leverage ratios for investors, which is beneficial for crypto futures trading. It is one of the safest and most reliable platform for trading crypto futures.
Perpetual futures contracts on WhiteBIT exchange are linked to the spot market asset prices and allow traders to maintain their contracts open without the need for liquidation of their position. This is made possible by WhiteBIT’s financing mechanism. To learn more about this feature, it is recommended to visit the WhiteBIT’s blog.