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Bitcoin Futures Trading, Is It A Good Idea?

Bitcoin Futures Trading

May 15, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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Get Into Cryptocurrency Trading Today

Futures trading has been there way before the first cryptocurrency was launched. Futures contracts are legal agreements to sell commodities at a prearranged time. The reason behind the agreements is standardizing the quality and quantity and quality of a commodity. In the agreement, the buyer takes the obligation to buy, and the seller has an obligation to provide the underlying asset. Does bitcoin futures trading work the same? We will find out.

It is worth noting that the goal of futures contracts is to hedge against the risk associated with price movement. The same applies to bitcoin futures. No investor can make 100% price or crypto market predictions. Futures help the traders reduce their risk and also increases their chances of making profits. 

Trading bitcoin futures gives the investors a roadmap to stay consistent in their trading. This way, they have a better guide to choose when to trade and when not to. Most crypto trading platforms today allow bitcoin futures trading. More so, many investors are participating in bitcoin futures trading, which goes a long way in increasing the market's liquidity. 

What is bitcoin futures trading?

The trading strategy allows bitcoin investors to interact with the cryptocurrency without holding it. The main idea behind bitcoin futures trading is market speculation. The initial bitcoin futures contract was established on December 11, 2017. The contracts work the same way as futures contracts for commodities.

The traders predict the future price of the contract. Bitcoin buyers and sellers agree that the buyer is obligated to buy bitcoin at a specific quantity, price, and time. In bitcoin futures trading, the buyer hopes that the cost of the cryptocurrency will increase. This way, he can buy the crypto at a price below the market value. This way, they make profits.

When it comes to the sellers, they hope that the price of the cryptocurrency will reduce to sell bitcoin at a price above the market value. 

Should you trade bitcoin futures?

Many exchanges are supporting bitcoin futures contracts, and incredibly, many investors are coming on board. The acceptance shows there is something good about trading bitcoin features. Here are some of the benefits that come with it. 

1. You can exit any time

Something important to note is that you do not have to hold onto bitcoin futures contracts until the expiry date. That is one of the reasons why you should not be reluctant in venturing into this market. American bitcoin futures contracts allow traders to exit any time they wish to. 

2. Hedging

Bitcoin futures trading allows investors to protect their assets from price fluctuations. Futures contracts create a break-even situation for the investors. The traders can either make high profit margins if prices go above the market value. If the prices fall, they also make a slight loss. 

If you feel that the price movements might work against you, bitcoin futures trading could be a great way to protect yourself. Miners who invest a lot in cryptocurrency use futures contracts to ensure that their income does not fall below their overall costs. 

3. A chance to trade on margin

Bitcoin futures trading offers investors the opportunity to trade on margin. This means that they can trade with more than they have. Traders can buy and sell futures on margin, using a small amount of capital. 

Investors can use bitcoin futures trading to grow their gains. 

4. It is a cost-effective way of short selling 

Bitcoin futures trading is an affordable way to short sell your digital assets. This comes in handy, especially for a highly volatile asset. Short selling allows traders to sell bitcoin when the price is high, then pay it back once the prices have gone down. 

Short selling bitcoin through futures contracts attracts lower costs. 

5. Bitcoin futures trading has cash settlements

Note that no active cryptocurrency trading takes place in the futures market. The agreements made have actual prices attached, which are settled with cash. Cash settlements eliminate complexity in the whole process, making it easy for traders to participate in this market. 

6. It is regulated

While the idea of regulation may not be attractive to cryptocurrency enthusiasts, it is beneficial in this case. It is worth noting that when there are rules to govern participants in the market, the bitcoin futures trading market becomes attractive to professionals. 
Their interest in this market increases the trading volume, which also establishes bitcoin as a significant asset. 

7. They are eligible for block trades

The other reason why bitcoin futures trading is a good idea is that they are block trade eligible. This means brokers can trade large amounts of the futures. 

8. Can trade in different market conditions

Whether it is a bull or bear market, you can trade bitcoin futures. Bull markets tend to bring high premiums in the market since the futures usually sell at a higher value than the speculated price. 

On the other hand, bear markets are usually where futures trade at a lower value than the spot price. The price drops usually originate from investors trying to preserve capital. 

Types of bitcoin futures trading

There are two ways you can trade bitcoin futures. You can work with fixed maturity futures or perpetual contracts.

Fixed maturity futures requires that the traders pay an agreed premium to open their positions. Once the contract expires, the trader may also need to pay a fee.

Perpetual contracts offer different pay structures. Note that they have to pay a fluctuating rate which often adjusts about four times a day. 

The main drawbacks of bitcoin futures trading include the fact that the price limits often cut the cryptocurrency trading profits. Most bitcoin exchanges are unstable, which could lead to losses and profit cuts. 

Conclusion 

Futures markets often draw the speculations of traders, which usually increases the volatility of the cryptocurrency. You need to keep your coins in hardware wallets or cold storage to reduce the risk of theft and hacking in exchanges.

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