Crypto futures have brought new and exciting ways to trade cryptocurrencies, but they have also brought with them unknown risks that traders need to understand and manage appropriately to prevent losing all their money. Luckily, some strategies exist that can help you avoid catastrophic losses and maximize the profitability of your trades.
What is a Crypto Future?
A crypto future is a financial contract obligating you to buy or sell an underlying cryptocurrency at a pre-determined price at a specified time in the future. Many cryptocurrency futures are available to trade on every major exchange, from Bitcoin (BTC) to Ether (ETH). As popularity grows, availability will continue to expand.
How to Trade Futures
It’s important to know how much risk you can afford and when to get out of a position or diversify into other investments if things go awry. Benefits of crypto futures trading include:
- Open a wide range of trading opportunities (ranging from long to short, or as a means of insuring your current portfolio against losses).
- Trade cryptocurrencies from your familiar online trading platform with flexible leverage (up to 50:1) to trade in future contracts on global exchanges.
- Increase your return on investment by shorting future cryptocurrency contracts. Shorting allows you to profit from a price decline. Just as a traditional investor can go long, you can go short.
- Enjoy full crypto liquidity via physically-delivered futures – i.e., your contracts are settled in physical delivery of the underlying asset (such as BTC). The physical settlement provides instantaneous trading execution and ease of mind regarding timely contract settlement.
Take your time to learn about the market. All investment markets offer opportunities for people who know how to take advantage of them through thorough research, patience, and planning.
Key Things to Remember Before You Start Trading
You should treat trading as a serious business like any other entrepreneurial venture. If you’re in it for fun, you’ll have fun watching your portfolio drop to zero. On a more serious note, start with small stakes so that you can make mistakes without losing too much cash (paper trading) in your bank account. This allows you to keep track of your trades then move on to higher stakes once you get more experienced.
Risks Associated With Crypto Futures
If you are serious about investing in Bitcoin and other cryptocurrencies, here’s a quick rundown of the risks involved with such an investment.
According to the experts at SoFi, “changes in price occur due to market factors such as prevailing prices, supply and demand levels, weather, government intervention, or other economic factors.”
Where an exchange employs traders to facilitate matching buy orders with sell orders, these traders may face liquidity issues that can cause a price change for their side of an order book. Liquidity in crypto markets is far less developed than traditional markets making it more susceptible to these risks.
The risk that a party in a contract will fail to live up to its obligations. Market makers on crypto exchanges are counterparty risks because they can’t always meet buy or sell orders when placed, leaving investors with few options if they want to exit their position. This is an issue for both crypto-to-crypto trading as well as crypto-to-fiat trades.
Futures are derivatives that allow investors to bet on future price movements of a stock or other asset without owning those assets. These contracts are standardized with set settlement dates, underlying assets, rules, strike prices, and expiry dates.