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Cryptocurrency Futures Market Overview

cryptocurrency futures market overview

May 11, 2021 | 

719 Views | 

JOHN K MWANIKI | 

Get Into Cryptocurrency Trading Today

There has been so much growth in the crypto space that many never expected, which has triggered the development of new and advanced crypto trading options, including the cryptocurrency futures market. Cryptocurrency future market is an integral aspect of the crypto ecosystem and represents a significant part of the traditional derivatives market.

Since the cryptocurrency futures market presents its own set of challenges, beginners are encouraged to learn more about derivatives and trading futures. That is very important to know the risks involved before entering the futures market. Luckily this guide provides insights into the cryptocurrency futures market and key things you need to know.

What are cryptocurrency futures?

Cryptocurrency futures are financial contracts or securities that allow you to utilize leverage to maximize your profits. You can use crypto futures to speculate on the future price of a digital coin or hedge the future value risk associated with cryptocurrencies. Crypto futures are well-established financial instruments that traders trade through regulated exchanges. 

So, to enter the cryptocurrency futures market and trade, you need an account with a futures broker that works with an exchange that offers crypto futures contracts. Top crypto exchanges such as CME, TD Ameritrade, OKEx, Bakkt, etc., support trading crypto futures for Bitcoin, Ether, and other digital assets.

A futures contract is a commitment to buy or sell the underlying virtual currency at a specific price on a future predetermined date. Many cryptocurrency futures are financially settled, which means you are responsible for your financial gains or losses. Some are delivered physically whereby one party is required to deliver the underlying asset and the other one the money.

Speculate on the market direction

The cryptocurrency futures market presents an excellent opportunity for speculating the direction of the market. As a trader, you can present your opinions in the market by holding futures positions. If you think bitcoins value is going to the moon, you have the freedom to go extra long on bitcoin futures and multiply your profits. Or, if you believe LTC will decline in the future, you only have to show that by going short on LTC futures.

Ability to go long or short

When trading in the cryptocurrency futures market, you can go long or short. This means you either agree to buy or sell the underlying cryptocurrency at a set price in the future. So, whenever you enter the crypto futures market and open a long or short position, the futures broker platform automatically matches you to another trader whose position balances yours. For example, if you go long, you match with a trader going short and vice versa.

Whether you profit or lose depends on the cryptocurrency's value at the date of settlement of the contract. Long traders usually make profits if the currency's value rises, while short traders profit if the currency's value falls over the time of the contract.

Specifications for futures contracts

Generally, futures contracts are uniform across the exchange: a particular number of assets per contract. For instance, the Chicago Mercantile Exchange has five. Every contract comes with an expiry date or settlement date. It is common to see quarterly futures contracts listed with March, June, September, and December settlement dates. When the maturation dates pass, the contracts are closed and do not exists anymore.

A cryptocurrency futures exchange also reports the volume of futures available for trade every day and gives traders thirty-day averages for that volume. That refers to the number of futures contracts traded but whose positions are still open.

Daily settlements

Cryptocurrency futures contracts also deliver daily. The futures broker takes a snapshot in time to settle every open account. As a trader, your futures broker uses the settlement amount to calculate daily margin requirements and financial balances. In most cases, crypto futures products trade 24/7 to cater to all global traders apart from the short time when the settlement is calculated.

The margin on bitcoin futures contracts

The accessibility of leverage is one of the main reasons why many people prefer trading bitcoin futures possible with borrowed capital. Every futures broker can have a unique margin condition as long as it is higher than the exchange's requirements. But the volatility of bitcoins and the rules of the exchange impact the leverage that the exchange provides.

Pros of the cryptocurrency futures market

  • One notable benefit of the crypto futures market is that experts and regulated exchanges run it. Top experts such as the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) are credited for developing successful platforms for trading cryptocurrency futures contracts. 

  • Bitcoin futures on CME are under Commodities Futures Trading Commission's regulations, making it easy for institutional traders to enter the crypto market without worrying about unregulated exchanges.

  • Crypto futures monitor the underlying movement of cryptocurrencies eliminating the need to open a digital wallet.

  • They are liquid, allowing traders to enter and exit their positions.

  • The commitment of Traders Report reports futures positions.

  • Futures enable traders to hedge their cryptocurrency exposure at a future date.

  • Cryptocurrency futures provide traders with leverage via margin accounts.

Cons of cryptocurrency futures

  • A trader cannot use cryptocurrency futures to pay for goods or services like cryptocurrencies in their wallets.

  • Futures contracts have an expiry date.

  • They are liquid when the exchange is open.

  • The margin needed for one futures contract can be sizeable for retail investors and traders.

CONCLUDING THOUGHTS

Cryptocurrencies are volatile assets, and many traders attempt to manage the risks by buying the currencies when the value is low, holding them, and selling them when the prices surge. But money is often left at the table when a trader utilizes this method. The cryptocurrency futures market allows traders to hedge existing spot positions without any additional cryptos, enabling them to prepare for any market trends. You can use crypto futures to speculate on the market direction and reduce risks while holding less crypto than you would in the spot market.

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