Crypto futures have conceivably been one of the most exciting instruments for trading since the arrival of digital assets. By allowing speculative exposure, they’ve supported an extra-industry interest in the cryptocurrency space, extending its mainstream appeal and propagating adoption. This ubiquitous allure has charmed even the most prominent finance monoliths, including the likes of the Intercontinental Exchange (ICE). Last year ICE announced its own iteration of crypto futures with Bakkt – prompting yet more industry involvement.
But what are crypto futures, and how can beginners learn the trading basics?
Crypto Futures Explained
Crypto futures are Derivative Products. Such products are a form of contract. In essence, futures form a commitment between two parties to either buy or sell an asset on a predetermined date, at a pre-established price. The agreement tracks an underlying; which in the case of crypto future is a Digital Token.
At their core, futures contracts are a bet. They enable traders to wager upon the future price of an asset. Participants can either go long, therefore betting on a price advance, or go short if anticipating a drop. Traders going long agree to buy the asset on a specified date, and vice versa for short-sellers. On arrival of the contract’s expiration date, the parties settle, and the contract closes.
Some futures markets also offer leverage, a strategy in which traders borrow capital to fund the contracts. In short, leverage grants exposure to larger positions without the need for funding the position upfront.
Traders using leverage don’t need to match the total value of the contract. Instead, they can use leverage to secure a contract with a comparatively smaller equity stake; this is known as an initial margin. Should the position move against the trader, there is a maintenance margin level that must be adhered to in order to keep the position open. A breach of this level results in the position being liquidated. Leverage thresholds differ from exchange to exchange. iFinex Financial Technologies Limited (“Bitfinex”), for example, offers 100x leverage. It equates to USDt0 100 for every single USDt0 staked by the trader in equity, which also applies to Tether Gold/Tether pair (XAUTF0/USTF0).
Futures Trading Basics
Futures contracts are best explained via a real-world example. Let’s assume that the price of a crypto asset is USDt 1,000. A trader believes that the asset will increase in value and wishes to buy 5 futures contracts. This brings the position value to USDt 5,000. The trader was right and now each contract is worth USDt 2,000. The trader can now sell the 5 contracts for a total value of USDt 10,000, pocketing a profit of USDt 5,000.
The same works for shorting. This time, instead of buying, the trader sells 5 futures contracts for USDt 1,000 each, totaling a position value worth USDt 5000. Following a price drop of USDt 500, the trader repurchases the original 5 contracts for a total value of USDt 2,500, keeping USDt 2,500 as profit.
For some, his method may hold more appeal than directly buying Digital Tokens outright. First and foremost, a significant barrier for entry lies in the somewhat convoluted storage of Digital Tokens. In futures trading, this difficulty is mitigated, with the exchange providing appropriate custody and in many cases, futures contracts are cash-settled contracts which completely bypasses this custodial issue. Another reason pertains to institutional traders. These traders are far more comfortable trading a Derivative Product, as futures trading rules are much the same in traditional financial markets as they are on a Digital Token exchange.
For advanced traders, crypto futures provide an interesting avenue for hedging. Traders who are already exposed to Digital Tokens can hedge against the risk of price fluctuations by taking an opposite position in the futures contract.
Futures also enable a capital-efficient way for users to gain market exposure to crypto-assets. Potential loss is already factored in, with collateral fixed during position entry. Moreover, futures allow traders to engage in a carry strategy, by receiving funding.
How to Access the Futures Market?
On Bitfinex’s Derivative Site*, Derivative Products’ trading is relatively straightforward. Bitfinex offers a type of Digital Token futures trading known as a perpetual contract. As the name suggests, perpetual contracts have no expiry date, enabling traders to hold a position indefinitely should they be able to fund it.
To begin trading, users need to credit their Derivative Wallet with USDt0. This requires a conversion from USDt to USDt0, which can be done via the ‘currency conversion’ tool on the wallets page. Once converted, users are ready to choose a position, either long or short.
To open a position, users can navigate to the derivatives page and select their Digital Token pairs. From there, it’s a simple matter of specifying the amount, price, and order type – either sell or buy.
Users wishing to implement leverage can choose their required amount via the slider. As mentioned above, leverage is restricted to 100x. Users can then press “derivatives buy,” or “derivatives sell” to submit the order.
For leveraged contracts, the minimum equity stake or initial margin is set at 1%. In other words, collateral must amount to at least 1% of the desired position. A Derivative Wallet containing 100 USDt0 can open a position up to 10,000 USDt0, thanks to the 100x leverage offered.
*The derivatives platform is provided by iFinex Financial Technologies Limited. References to Bitfinex Derivatives in this post are references to iFinex Financial Technologies Limited.
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