What Is Futures Trading in Crypto 💯 and How Does It Work??? 🤔

How Does Futures Trading Work?

If you had watched the process of cryptocurrency futures trading on a crypto exchange platform like Bybit, you wouldn’t tell the difference from regular trading. That’s mainly because traders do precisely the same thing in both cases – open long and short positions and implement proper risk management techniques.

However, futures contracts are very different from spot trading because they don’t operate with the underlying assets but only with their price action. Without the actual asset, futures are way more fluid and easier to handle. Also, they enable margin trading with high leverage.

What Is a Futures Contract?

Futures contracts are part of a large category of trading instruments known as derivatives, including— Contracts for Difference (CFDs), Options, and Swaps.

Initially, futures contracts made sense for many commodities, including foods, oil, and metals. However, they soon went beyond their practical reasons to conquer all financial markets, including cryptocurrencies. Today, most commodity price quotes you see on financial portals involve futures, usually with a monthly expiry date.

In a nutshell, a futures contract is nothing else than an agreement between two parties to either buy or sell an asset, such as digital currency, on a predetermined date, at a predetermined price. The contract tracks an underlying asset, be it a commodity, stock, or cryptocurrency. It is basically a form of bet on the future price movement.

For example, if you think that Bitcoin (BTC) will increase in price by the end of the month, you would be interested in opening a long position on the cryptocurrency by buying a Bitcoin futures contract with a monthly expiry date. Otherwise, if you believe Bitcoin’s price will go bullish, you would go short. At the contract’s expiry date, the two parties involved in the trade settle, and the contract closes.

While a futures contract’s condition is to have an expiry date, there is a subcategory of cryptocurrency futures called perpetual contracts. What separate perpetual contracts than the rest is it does not have any expiration. They behave exactly the same as traditional futures but without any expiry and settlement. 

The price of a perpetual contract monitors the cryptocurrency spot price and trades very close to it. The primary mechanism making perpetual contracts possible is the funding rate, in which long and shorts make regular payments to each other depending on the market situation.

How to Trade Crypto Futures?

Trading cryptocurrency futures is no different from other trading forms, and the difficulty level depends on the leverage you pick. You should follow most of the valid rules when trading the spot markets or other derivatives, be it CFDs or options. Most of the rules have to do with risk management and finding the best entry and exit points.

Here are the main steps to successfully start your crypto futures trading journey:

Bybit’s Demo Account

• Set aside some funds – one of the most critical risk management recommendations is you should never invest more than you are ready to lose. And never borrow to trade unless we’re speaking about the technical borrowing used in margin trading.  

• Dedicate time – you shouldn’t treat your crypto futures trading as a hobby if you plan to turn it into a lucrative activity. Make sure to dedicate time to learn futures trading, find the right entry points, and monitor your open positions.

• Trade on a demo account – you can start trading with virtual funds on a demo account. It usually mimics the spot price of Bitcoin or any other cryptocurrency before going to futures. Try to trade on Bybit’s demo account for free here. 

• Choose a futures trading platform – reputation is a key when selecting a crypto exchange. So, if you are a beginner, start trading on a reputable exchange, and you should always start small.

Trading perpetual contracts will require you to automatically pay a rate or get paid. But, depending on whether the contract’s price is higher or lower than the spot price. Also, if you use leverage, you should check the position margin, which is fluctuating with the price. If it drops below a certain threshold, your position will be liquidated, and you will incur a loss.

©️Source:bybitlearn