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Why Trade Cryptocurrency Futures?
- Crypto futures are an agreement between two counterparties to buy and sell a specific amount of underlying crypto at a specific future price on a specific date and time.
- They allow you to gain exposure to a wide range of cryptocurrencies without ever having to own them.
- Individuals and organizations that do own cryptocurrencies can use futures to hedge exposure against market movements.
As the crypto market continues to grow, so does the variety of products available within the cryptocurrency space.
Our detailed guide covers the basics of crypto derivative types, trading options, tips for trading, and their advantages and disadvantages
Type of Derivatives in Crypto
- Crypto Futures
- Crypto Options
- Perpetual Contracts
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Futures involve an agreement between a buyer and a seller to sell an asset in the future. The specific date and amount are also agreed on ahead of time. Contract details may vary, but the terms are usually similar.
Futures are a popular type of crypto derivative commonly used by institutional clients. Data from futures are typically used to predict future price movements and market sentiment.
Users may either gain or lose depending on future price changes. For example, if the current price of Bitcoin is $40,000, a user may buy or sell futures contracts in anticipation of either a price decline or an increase.
In any case, if a buyer purchases a futures contract worth one Bitcoin ($40,000) and it increases to $60,000 by the time the contract closes, the buyer will have realized $20,000 in profit. On the contrary, if the price drops to $30,000 by the time the contract closes, the buyer will have incurred a loss of $10,000.
More specifically, Bitcoin futures are agreements between a buyer and a seller to buy and sell Bitcoin at a given price at a specific date in the future. The contract is usually settled in USD or any other currency agreed upon by both parties.
Options are another type of derivative contract that allows a user to buy or sell a specific commodity at a set price on a future date. Unlike futures, however, options allow the buyer the opportunity to not buy the asset if they choose.
There are multiple types of options: call and put options, as well as American and European options. Call options allow a user to purchase an asset on a given date, while put options allow a user to sell an asset on a given date. In addition, American options can be sold before the contract’s expiry date, whereas European options need to be sold exactly on the agreed date.
Users are required to pay fees to buy a contract. For example, if an option costs $800, a user will bear this cost to enter, on top of the actual price of the asset they want to purchase.
Regardless of the trade outcome, the user must pay the $800 fee. So, it’s worth noting that options are not a completely-risk free method of trading crypto derivatives.
Let’s look at this example: Say you enter a call option for Bitcoin at $50,000. However, upon the agreed date, the price dropped to $40,000. You would not have to bear the $10,000 loss in an option. You can just exercise your right not to fulfill the contract.
However, the $800 fee you paid to buy the contract will not be returned. In this case, your total loss would be $800.
A perpetual contract, also called a perpetual futures contract or perpetual swap, is the most prolific type of crypto derivative, especially among day users. In traditional finance, the equivalent of a perpetual contract would be contracted for difference (CFD).
The main difference between perpetual contracts vs. futures and options is that perpetual contracts do not have an expiry date. Positions can be kept for as long as the user wants, provided they pay holding fees, called the funding rate. The account must also contain a minimum amount, called the margin.
Underlying assets typically change in price, which means that the difference between the index price and the price of perpetual futures contracts is typically huge. If, for example, the price of the perpetual contract is higher than the index, those who chose to “go long” would normally pay the funding rate to cover the price difference.
Likewise, those who chose to “go short” would pay the funding rate to cover the price difference should the perpetual futures contract price be lower than the index price.
Crypto derivatives trading is a great option for both beginner crypto users and seasoned ones. You can go with various options, depending on the level of risk you’re comfortable with.
Cryptocurrencies are subjected to high market risk and volatility despite high growth potential. Users are strongly advised to do their research and invest at their own risk. BitMart will do its best to list only high-quality coins, but will not be responsible for your investment losses.
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