Traders use a variety of strategies. One of the most interesting and potentially profitable is futures trading. With proper risk management and market analysis skills, futures can multiply traders' profits and enable them to operate with small initial capital, especially in the highly volatile cryptocurrency market.
A futures contract is an agreement between a buyer and a seller to buy/sell an asset in the future. The date of the transaction can be either predetermined or perpetual. The subject of the deal is not the asset but its price. Because of this, futures trading is more flexible and includes margin trading with the ability to use leverage.
Leverage is a tool that allows you to multiply your position. For example, with only $100, you can open a $1,000 position with x10 leverage.
Futures Contract Types
Cryptocurrency exchanges offer several types of contracts to suit traders' needs. But be aware not all of them are available on exchanges.
Standard Futures Contract
A Standard Futures Contract has all the attributes of futures from traditional finance, namely expiration and settlement.
The most common offering is a quarterly BTC to the dollar or USDT future.
Physical Delivery Futures Contract
A futures contract with delivery means you will receive the cryptocurrency at the end of the term. Using this contract, the trader can receive the cryptocurrency and contribute to the selected asset's circulation.
This futures contract, unlike the others, has no term. As well, its price remains quite close to the spot market price. At the moment, this is the most popular contract type among cryptocurrency traders.
Futures Trading Challenges
It's important to point out that futures trading is especially risky. To be successful in futures trading, you need the following:
- The ability to analyze the market to predict the growth or decline of an asset;
- Skills in setting Stop-Loss and Take-Profit;
- Willingness to operate in the cryptocurrency market with high volatility;
- Awareness that the cryptocurrency market changes 24/7.
These factors combined can be confusing for even an experienced trader who has never dealt with futures or cryptocurrencies.
Futures Trading Advantages
Along with the risk, trading in futures offers great opportunities. For example, you can profit from high volatility in the cryptocurrency market, where Bitcoin has risen and fallen by hundreds of dollars every day in recent months.
Also, an important factor is an opportunity to use leverage, which can increase the potential profits dozens of times, but the risk will increase significantly. Moreover, the cryptocurrency market has fewer restrictions and conventions. This flexibility makes it possible for futures traders to use features that aren’t available in traditional finance.
Futures Trading Stats
Futures trading is quite popular among cryptocurrency traders. For example, the volume of perpetual futures contracts on Binance at the time of writing is about $2B for just one pair—BTC/USDT.
Futures with an expiry date are less popular among traders, making up about a quarter of perpetual futures.
In 9 out of 10 perpetual futures positions, traders favor Long even in a bear market. What is also important, the volume of futures is maintained even with BTC price fluctuations, which can be seen on the monthly chart:
On average, futures volume for the month settled at 2-2.1B USDT for Binance Perpetual Futures. However, it should be noted that overall futures trading volumes decreased on the back of the ongoing crypto winter, but still remain at a decent level. As of today, the trading volume of futures on various exchanges has settled at $10B.
Cryptocurrency futures trading is a lucrative but risky venture. A trader can make a small initial investment to succeed at trading cryptocurrency futures. However, such trading requires a certain level of knowledge and skills from the trader. The ability to analyze the market, set stop-loss positions, as well as use leverage reasonably will help not only to keep the profit but also to multiply it.