Futures is a commonly used financial instrument that is widespread in traditional markets. The essence of futures is easy to guess from the name – that’s something connected with the future. In simple terms, futures trading means forecasting the future value of an asset with the purpose of making money in the case the prediction is correct. In traditional markets, they use gas, petroleum, grains, silver, gold, stocks and any other commodity to “bet” on their future value. How is it possible to guess it? Of course, the essence is not in guessing but in in-depth research and understanding of every commodity as well as factors that impact their price. Having this understanding, traders make a fortune from futures deals. Now let’s switch to crypto and see how this tool works there.
What are Futures in Crypto?
Crypto futures is one of the most popular advanced financial instrument as well as the riskiest. When it comes to the cryptocurrency market, rates rise, for this market is much less predictable and much more volatile compared with traditional markets. The crypto industry is still very young and unstable. To make any prediction in this field, traders do several types of research. Let’s take a look at them:
- Technical analysis. Traders research the price chart and find patterns and historical indicators, match them with the news background and other events that happened simultaneously, and see how the asset reacts to different events and changes. In the same way, they see how the price reacts to market volatility. There is a whole science to learning crypto charts, including different forms of candles. Based on past price changes, traders draw a conclusion on how the asset may behave in other situations in the future.
- Fundamental research. This type of analysis includes external events and factors that can affect the price of the asset. They include the overall economic situation, inflation, different scandals and events in the world, wars, crises, etc. Indeed, things that happen in the world impact every field and crypto is no exception.
- Quantitative analysis. Wrapping up two previous types of research, traders find indicators and calculate to make the final decision if it is worth buying the asset and when to do it better.
So, suppose a trader did some research and came to the conclusion that the Bitcoin rate will increase in a couple of months. What are his next steps?
- make a futures agreement where he states that the BTC rate will be (for example) $25 000;
- indicate the date when he owes to sell his bitcoins at the claimed price.
The feature of cryptocurrency futures is that traders do not necessarily buy or sell coins here and now. Instead, one makes a contract on buying or selling them on the day in the future (stated in the agreement). When the day comes when the Bitcoin price really reaches the claimed level (the trader’s prediction is correct), one sells his coins and makes money from them.
Let’s see the reverse situation. Suppose the trader thinks the Bitcoin value is about to drop. So the trader sells out his coins and makes an agreement to buy them back on the date claimed in the agreement and at a price the trader claims. Suppose the trader did research and came to the conclusion that the Bitcoin rate will fall to $15 000. He sells his BTT at the current rate (which is higher) and enters into a futures agreement. If his forecast is correct and the BTC rate really drops, one buys back BTC at a lower rate, thus, making money (because he sold his coins at a higher rate before). It turns out that he still has the same number of BTS but more income (due to its sale).
As you might guess, this type of trading really needs in-depth knowledge of the market and the asset you work with. There must be a lot of work done to reach success in crypto futures trading. That is the reason why this tool is not a good option for beginner traders.
What Assets to Pick for Cryptocurrency Futures Trading and How Does it Differentiate From Spot Trading?
Why did we offer an example of BTC futures? Because Bitcoin is the top-traded crypto coin with the largest trade volume. The essence is to choose crypto that is always in demand. That should be a relatively reliable asset with low volatility. That is, rather stable and resistant to market fluctuations. Bitcoin suits these requirements the best.
Many people ask what the difference is between futures and spot trading. Both spot and futures trading styles belong to traditional financial instruments in all other markets – commodities, stocks, etc. Here are some crucial things to know:
- Spot crypto trading involves buying digital assets here and now. That is, you place an order to buy this or that coin, pay the fee and receive assets in your wallet immediately (in a matter of minutes, depending on the network you use). Crypto futures do not necessarily mean that you are to buy or sell digital assets right away. What you are buying now is a derivative contract which includes the date and the price at which you will execute your agreements in the future.
- In spot trading, you generate income front the growing crypto price only. When it comes to futures, you may make money both on the growing and falling market trends. The main here is to forecast the market’s direction correctly and place the right position – either going “long” or “short”.
- The next crucial difference is leverage. Using a leverage ratio, traders can make their futures trident extremely profitable. For example, to buy one bitcoin on the spot trading, you would need to spend over $16 000 (in December 2022). If you pick a futures derivative agreement, you can spend just a fraction of the BTC value with the help of leverage. The leverage ratio may be different depending on the crypto platform you use. For example, on WhiteBIT, it is up to X20. The bigger the leverage ratio you take, the less initial investment you need; however, the more risk you take. On the contrary, you cannot use leverage when you trade on the spot market, and you can only buy as many Bitcoins as you can afford to have your initial capital.
- Liquidity. Such digital assets as Bitcoin are always in demand and there are always those willing to open the opposite position (for example, you go “long” and someone else thinks that the BTC price will drop and opens the “short” position), so there is always liquidity in the futures trading market for such assets as BTC.
- Prices on the spot market are determined by the ratio of demand and supply, while prices on the futures market are suggested based on traders’ forecasts.
The Most Common Crypto Futures Trading Strategies
Like regular trading, crypto futures trading has basic strategies to adhere to for getting a result. We would like to list the most often used crypto futures trading methods and describe some of the most popular of them in more detail.
So here are the most common methods for cryptocurrency futures trading:
- Long or short
- Trading the range
- The pullback strategy
- Spread trading
Let’s discuss a couple of the most used methods – long or short and pullback.
Long Or Short Crypto Futures Trading Method
Depending on the results of a trader’s research and one’s decision on the future digital asset’s movement, one takes the decision – to go “long” or ‘short”. As we have mentioned before, going “long” means that the trader believes the asset’s rate will go up and he will sell his coins at a higher price. Going “short”, in this case, means that the trader suggests the future asset’s rate is lower and plans to buy back coins once their rate drops. Thus, one still has the same number of digital coins but selling them beforehand helps to generate income from the price drop. That is the easiest and the most popular strategy in futures trading.
The Pullback Futures Trading Strategy
Price pullback is the basis for this type of strategy. The cryptocurrency market is incredibly volatile. Digital coin rates are always boosting over or under the support and resistance lines and then going back in the opposite direction to the level they have crossed.
The line of resistance is the level, which the asset’s rate hardly breaks. The line of support is the level, which the price cannot break below, which means the coin may hardly go lower than the support line. So when the market goes up, the crypto rate crosses the resistance line and breaks it, and then it retests the former resistance line again, going in the opposite direction – moving down. If the asset’s rate cannot fall to the former line of resistance, the trader places the “log” position.
Where Can I Get Enough Experience In Crypto Futures Trading?
Being one of the most difficult trading tools, futures derivatives need a sufficient level of knowledge of the market trends and an understanding of all the factors that may affect the asset’s price, as well as a lot of practice. It might be frustrating if you fail from the first try, so it would be much better to have some practice before starting crypto futures trading in real. For that purpose, some crypto exchange platforms allow demo trading.
You may try, for example, the WhiteBIT crypto exchange demo account. It has demo tokens released intentionally for the purpose of training, which functions only on demo accounts. While practicing, you can learn how to trade crypto futures using different leverage ratios and comprehend what leverage is suitable for trading with risk control.
Conclusion
Education and practice are key to success in crypto trading. Beginner traders may find it challenging to trade futures, but with sufficient experience, a good and reliable platform, and convenient tools, it is possible to succeed. To keep abreast of the latest market news and stay up with industry updates, welcome to the WhiteBIT cryptocurrency exchange blog. Right there, you will find helpful guides on trading with leverage and futures.
