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Individuals involved in the trading of cryptocurrencies utilize various schemes to get ahead of the competition and become widely known traders. All the several techniques and schemes utilized by traders around the world have their usability based on personal preference. Spot trading is one of the techniques that is known to be widely used, but other methods like crypto futures trading is seen to be quite uncommon.

With that in mind, we will now move towards understanding the basics of crypto futures trading, how they work and what perks does it bring for individuals that are interested in its usage.

Crypto Futures Trading Concept

In basic terminology, the concept of Crypto Futures trading is quite like the futures trading idea that is still utilized in the traditional market. Futures contracts are utilized in this type of trade. Futures contracts are officially registered consents that allow individuals to perform trading activities over different assets with the coming time by predicting their valuations.

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In terms of cryptocurrencies, the concept involves purchasing a certain cryptocurrency asset on a consented valuation in the coming time, without regarding the original valuation that the asset reaches in that amount of time. The time of purchase that is set ranges between the frame of a day to many years depending upon the consent. And because it is a contract, the trade will always conclude at the set time frame.

The name “futures trading” originates from the idea that individuals involved in such type of trade have to figure out the valuation of the asset on the time period that is agreed upon and so, many see this as a type of method that is associated with gambling, as individuals are not aware of how the asset will function in the coming time, so they have to make a guess their success in the trade depends upon that guess.

Lets’ move towards the working.

The Working

Individuals involved in crypto futures trading are required to figure out the valuation of certain cryptocurrency assets in the coming time, based on the performance levels of the assets. The prediction is either made through by looking at numbers or performing a proper technical analysis and in some cases, trading individuals like to utilize both techniques for them to achieve an accurate speculation and gain profit out of it.

Let’s look at an extensive example that will help us understand the idea better. An individual is looking to initiate a consent, wanting to sell his Ethereum assets on a set valuation by 21st of November in this year. The ones interested in the trade must engage in a high point in the consent.

Taking into consideration that the valuation set is $3000 for each Ethereum, with the standing valuation hovering in the $2300 range, the one looking to sell the assets will gain profit if the valuation remains below $3000 and the one purchasing will have to buy at a loss.

But in case the price valuation has managed to spike to $4500 by 21 November, the seller will face a loss and the one purchasing will gain a massive profit. The thing with futures contracts is that they can be revoked, but this can only happen if the trader engages in a mirrored trade compared to the current one, however if the due date has arrived, the consent is to be completed at all costs. A cryptocurrency futures consent consists of three vital parts.

  1. Expiry Period

This is the date and time that is locked on which the futures consent will conclude. Both buyer and seller must conclude the trade at the valuation that has been agreed over. Conclusion of a trade can be done through either the buyer having the assets physically delivered to them or cash is exchanged between the buyer and the seller. Traders are also able to sell on the consent to another investor if they want, however this must be done within the date set.

  1. Asset Valuation in Contract

This highlights the valuation of the assets for every consent, and this is different for every platform. The CME group provides a single futures consent that has the value of five Bitcoin, while the bitcoin futures consent provided by Deribit is worth about $10 of Bitcoin.

  1. Leverage

For the trading individuals looking to boost the profits, they often take funds from different cryptocurrency exchanges and then proceed to feed the trade size. This concept is known as leveraging and traders can swell to several times, like 5 times, 25 times, but this multiplication is mainly dependent upon the exchange that is being utilized to do so.

The thing to keep in mind is that while taking funds might boost the trade size, it can lead to severe consequences if the trade does not give out anything, hence producing a level of risk in which if you are not able to produce anything, liquidation will occur and the funds you gathered are evaporated, leading to more trouble.

The level of funds you put into the trade is solely based over the margin that you have. The margin is the least amount of collateral that you need to possess for the trade to be initialized. The level of funds is directly proportional to the margin that will be needed by an exchange or middleman for the trade to be successfully initialized.

Several exchanges like Binance have a set value of percentage margin for different assets. Other types of solutions can be used, but the percentage margin will be different.

According to sources, the latest percentage margins set by Binance for Bitcoin and Ethereum are 50% and 60% respectively.

Places For Crypto Futures Trading

Looking back, the Cboe Global Markets exchange was known to be the first ever exchange from the USA to provide traders with the opportunity to engage in Bitcoin futures trading, back in the year of 2017. The CME group also took the track soon after.

Regarding a report, as of this year, the exchanges with the most exposure in cryptocurrency futures trading consisted of popular ones like Binance which is currently crowned the king of exchanges in terms of Bitcoin futures volume that was recorded to be more than $4 billion and Bybit that managed to secure more than $2 billion in volume.

Next in line comes the previously mentioned CME group that also has more than $2 billion in volume, FTX which is a platform that has recently gained exposure as it climbs its way up and lastly comes OKX which is also one of the most well-known exchanges around the world, but its shortcoming is that it is banned in the USA because of issues with regulatory bodies.

Alongside these, there a ton of viable cryptocurrency exchanges that provide the opportunity for traders to engage in cryptocurrency futures trading, helping them seek a path that is truly unique despite the risks that it brings.

Perks of Crypto Futures Trade

There are a long of significant perks that can make crypto futures trading quite an attractive option for traders around the world to seek. Below mentioned are the best and most significant perks of taking part in crypto futures trading that can help you gain an upper hand.

  1. Regulation

This is one of the key perks that comes with crypto futures trading. The whole concept promotes regulation towards cryptocurrencies. As we know, the crypto space is known for its serious volatility that brings massive price valuation changes in minimal time frames, so the crypto futures trading can become more beneficial.

Currently, Bitcoin futures consents provided by the CME group are under the supervision of the Commodities Futures Trading Commission (CFTC), making the trading method a very suitable and trustworthy option for institution-based investors.

  1. Easy Investments

With Bitcoin futures, the path towards acquiring Bitcoin becomes much easier. Investors are not required to make a Bitcoin wallet and do not need to make use of asset custodial services when performing trades, as solid Bitcoin exchanges do not exist. Another perk associated with this is that it removes the risk of carrying a physical asset that fluctuates in valuation.

  1. Secure compared to direct Crypto

Since futures consents come with positioning and valuation control, it provides a much more secure way of accessing Bitcoin, without having the need to suffer any major loss. With this the risks associated with certain asset classifications are dropped even further.

  1. Control over Positioning

The restriction limits in terms of positioning are different for all exchanges. The CME group has a limit of two thousand for front-month futures consents and five thousand for consents associated with other areas. Another example can be of Binance, which has managed to deploy a special functionality that allows limits to be changed manually according to previous trading activities and margin levels.

Looking at the Risks

Alongside the many perks that make futures trading an attractive option comes the various set of risks that trades should be aware of when going into this side the trading space. Although the risks might seem not much of an issue, however their level of severity should not be ignored in any case whatsoever.

Looking back at the concept of leveraging discussed earlier in the article, traders looking to feed the trade must borrow funds from other entities to make ends right. It is known that exchanges do not allow traders to borrow any funds unless they provide some source of insurance or collateral that can counter the aftermath incase the trade goes south. The source insurance is called as the “initial margin”.

This initial margin must be assigned by a trader before that are able to initiate a trade with leverage. Leveraging can either boost the profits to insane levels, but if the trade goes wrong, then the losses are boosted along the same manner.

There are three main aspects that we need to take a closer look at.

First comes the ‘Margin account’ in which the initial margin is placed, secondly, the ‘Margin calls’ through which an individual is called to check that the funds in the margin account are running out and lastly, the ‘Maintenance margin’ which is known to be the level of funds that are required to be submitted into the margin account by the individual in case the initial margin is running low. This can also be referred to as a standby margin.

If the market becomes unprofitable for the trader and the margin account associated with the trade has run out, then the process of liquidation is initialized in which the trader losses the position and the initial margin alongside.

Some individuals keep their initial margins high to keep a good and lengthy position in the market, believing that the market would become profitable in some time. The trader must sacrifice more funds to keep the position secure, so the level of risk here increases.

Important things to Keep in Mind

There are a couple properties that must be burrowed onto you mind before getting into the action of crypto futures trading.

Firstly, comes the trading volume. The values of trading volumes associated with crypto futures can be like those coming in from spot trading. Changes in valuations can become quite severe, specially when the market is heavily volatile. When this type of market situation is present, crypto futures can have almost the same valuations to spot trading or can also be exchanged for higher or lower prices accordingly.

What this brings is that Bitcoin futures might not be safe from the level of volatility in the market. The Securities and Exchange Commission (SEC) has had a history of warning individuals on the risks that come with crypto futures last year. The SEC highlighted that this trading segment is solely based on luck and prediction, so investors must keep it in mind.

Secondly, there is the issue of exchanges that are not subject to any regulations. There are only a few platforms or exchanges like CME that are complying with regulations set by the CFTC, while most exchanges bringing futures trading are not under the supervision of any regulatory agreements.

Legal Status of Crypto Futures in the United States

Looking at the United States of America (USA), crypto futures are allowed, but are only available through registered and approved crypto exchanges or brokers that are associated with the CME group. There are many different brokers such as Interactive Brokers, Ironbeam, Edge Clear and many others that allow traders to take part in cryptocurrency futures trading activity.

Looking at other nations, it depends upon every different country. Some governments in countries like China have a negative view towards cryptocurrencies, so they are not legal there, however others like El Salvador have gone as far as making Bitcoin legal tender.

Differentiating Futures Consents and Perpetual Swapping

The main difference between futures consents and perpetual swapping is that, as mentioned before, a crypto futures consent consists of an expiry date that must be followed to conclude a trade, but in the case of perpetual swapping, there is not expiry period. The concept behind both is almost the same though.

With perpetual swapping, traders can maintain their consent to purchase or sell for an indefinite length of time, if they are able to maintain the margin costs, until they are able to conclude the trade or make a deal with another investor. Because of this unique mechanic, to make sure that the consent valuation stays consistent with the spot valuations, the method of “perpetual swap funding rate” is utilized.

This method makes sure that both sides are paying a small charge to each other, which is dependent upon the consent’s valuation in the market. In the case the valuation falls below than the perpetual futures valuation, then the lengthy traders will have to be charged by the short traders as a way of making traders move away from long and vice versa. This method can come quite handy to know more about a certain asset’s position in the market.

Final Thoughts

Futures trading is just like other types of trading methods and can lead to quite a significant level of profit, but to be successful in it, a trader must possess the experience to do so, making sure that the losses are not too significant and are below the profit levels.

If you do not possess the necessary skills and experience to make it through the market, then it is quite difficult to handle the volatility that comes in the market. Everything requires practice and the ‘hit and trail” method is the best way.

But this should not discourage you in any way. Start with low and try to learn about this trading method to get more exposure into it. This can not only help you learn the concepts over time but will also help you to gain knowledge about market activity.

With this you can engage with crypto trading futures in a much comfortable way, and you will be able to make the best decisions when you invest into it and manage to make more than what you might lose in the process.

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Nathan Ferguson

By Nathan Ferguson

Nathan Ferguson is a talented crypto analyst and writer at Herald Sheets, dedicated to delivering comprehensive news and insights on the ever-evolving digital currency landscape. With a strong background in finance and technology, Nathan's expertise shines through in his well-researched articles and thought-provoking analysis. He holds a degree in Economics from the University of Chicago, and his passion for cryptocurrency drives him to stay up-to-date with the latest industry trends and developments.