Crypto Futures Trading Guide

When the crypto-asset markets are hot, you want to get involved and do not want to get left behind. You want to learn all you can about the market, jump in, and aggregate as much value as possible.

That is a great strategy and can yield a great deal of returns. It is even better when it is an emerging asset that can present a new store of value, is censorship-resistant, mimics gold properties, and adds technological value in several ways.

You would want to participate in this asset class, minimize your risk, and participate without having exposure to attacks, thefts, or other digital issues that may occur in the spot markets.

What should you do? The best answer is that you should take the time and invest your time in learning more about the cryptocurrency futures trading markets. Now, this market is definitely not for everyone as it does take quite a bit of skill, patience, due diligence. But if you understand how to conduct it correctly, it can definitely playoff.

Now, it is even better to use futures in an automated fashion. If you are able to automate the process, then you can certainly minimize your manual actions and pick up futures at one point and sell them at another. You can read the markets, input the right points into your system and win.

Here is what you must know about crypto futures and how you can implement trading bots on this market.

What is Crypto Futures Trading?

Cryptocurrency futures are intriguing types of speculation that have come to the forefront over recent years. It adds another layer of excitement and intrigue to the digital asset markets and provides different ways to go long on digital assets and to bet against them. Individuals appreciate the speculative exposure that is present within these types of markets and will enjoy participating in these markets.

But what are crypto futures, and how can new individuals learn the essentials of this market?

Crypto Futures in Nutshell

Crypto futures are derived from the underlying asset movements. That is why you will notice that they fall under the category of derivatives. You are not participating in the market as it is but rather at some different point. You will notice that these are contracts.

These contracts are an agreement between two entities to either purchase or divest an asset on a specific date, at a specific price point. As noted earlier, the contract will look at the underlying asset, note the price where it is at the time, and that is how one can establish the results. The underlying asset, in this case, is a precious like bitcoin or a non-precious digital asset like some random token.

If you thought that these futures contracts look like they are bets on the future…well you certainly guessed it. Speculators are able to say where they think the price of a specific asset will go and bet accordingly. They can bet for it or against it.

Indeed, you can ask yourself if you are long or short an asset. If you are positive on an asset, you are long, if you are negative on an asset, you are short. When the date you agree on rolls around, the expiry takes place, and the settlement happens.

A few futures markets can also provide leverage, a stratagem where speculators borrow funds to place value into their agreement. In summary, borrowing funds allows for bigger positions without having to account for it initially.

The beauty of leverage in crypto futures is that you can input a bit and still control a larger portion. You can have a relatively nice equity stake, a bit of debt, and a lot of control. Fun, right? The initial margin is great when it goes your way but bad when it turns against you.

The next component when using leverage is that you will have to maintain your margin if the position starts going in the wrong direction. If you do not do it, the position will close and you will liquidate.

Varying entities will look at margin maintenance in a different way. Some would ask for more initially and ongoing while others may cap it at a certain level.

Futures Trading Examples

Let us say that you are excited about ETH and want to go long. What should you do? The first step is that you should enter into an ETH futures contract on the right exchange. You will want to choose the expiry date, the price point, and the amount of leverage you will use within the contract (if applicable).

Let us say that the price of ETH is $1,400 USD right now. You think that it will go up to a certain point and you choose to purchase 2 futures contracts.

This brings the position value to $2800. You were correct! The value of ETH did go up. Now each contract is worth $1,800. You can sell each of the contracts for a certain return and earn a profit.

You can short the asset too. Let us say you think that ETH will go down in value. You can sell it short. You can sell 6 contracts short for, say, $1,200. The price drops and you repurchase the contracts for a lower level and now you have earned the difference.

Investors can use futures trading bots to automate these actions and conduct specific strategies that we will cover later.

Individuals appreciate these contracts because of a variety of reasons. They do not have to take extra actions or go through cumbersome processes to purchase and store the actual assets. This process allows for entering into simple contracts, allowing simple entry, and minimal worry or zero worry of storage.

The entity you are on will conduct the storage automatically, you merely enter into a contract, it custodes the asset seamlessly, and you may even settle in cash which makes it to where custodial relationships are far from necessary.

Institutional speculators appreciate futures because it allows for a different type of simplicity. Of course, they must know what they are doing and should have experience in participating in these markets but they can realize overall simplicity.

First, they do not have to think about custody, cyber-attacks, or other risks when they cash settle. Further, they are used to this type of trading as they do so in regular financial markets. Futures speculation rules do not vary from the traditional asset areas to crypto asset areas.

Indeed, these individuals can use crypto futures to hedge their bets and risks accordingly. Those who have exposure to actual assets can think about hedging against price movements by taking differing positions in their contracts.

For instance, if they are long on the spot and asset side, they can go short, within reason on the future side.

The other intriguing aspect of crypto futures is that you can obtain value-efficient ways to obtain market exposure to digital assets. For instance, they can cap the loss factor, go long, with leverage and have a certain set of collateral that is up for stake. These aspects enable a carry option that maximizes cash.

How Do You Access the Futures Markets?

You can access the futures markets quite easily, merely, go to a specific entity that supports these markets and understand how they execute. You can find that these options are present at varying prominent entities that are found in Asia, the United States, Europe, Bermuda, and other places.

In many of these places, you will notice that speculation is quite straightforward. You can find differing contracts such as perpetual agreements or more traditional ones. Fixed futures are ones that will have an expiry date, the perpetual will go on with no expiration. That means that you can continue to hold that position perpetually as long as you can afford it.

To begin the trade, one must initiate the contract, fund it, place the right points, and choose the positions. Remember to specify the amounts, the price, and the overall order element, you have two, you can purchase or divest.

Users that want to leverage may have that option, depending on the entity. You can, in most cases, slide down or up, on the portion of leverage you seek. A few places will provide 1000x while others may only keep it capped at 100X.

Note that there will be an equity stake that you must account for overall. It might be a minimum of 2% or less.

Pros and Cons of Futures Market

Why these derivatives or futures matters to you in the larger picture.

The Pros

Simplicity Is Essential

Remember that at the start of the digital asset sector it was hard to adopt cryptocurrency. People did not know where to go and did not trust the exchanges that were in the market at the time. But it has gotten much more simple since the 2008 or 2009 origins of the digital asset. One can see that firms are also discovering the value of the blockchain and different digital asset use cases.

While bitcoin can be quite novel today, it can be a typical concept tomorrow as individuals understand the simple reasons behind its existence. Simple reasoning combined with simple forms of access provides immense value for the digital asset sector. One can easily access it with their favorite mobile financial apps without any issues.

Doubts to Adoption Options

The cycle of technology adoption is first doubt then the next stage of curiosity, then a bit of exposure, and finally accelerated and quick adoption. The data from firms such as Grayscale show that institutional adoption is going up.

That means that firms are placing their skepticism aside, getting off zero, and investing a little bit in bitcoin. It is likely that bitcoin futures have a bit to do with that.

It is not too crazy to say that institutional investors will continue to gain more energy as they allocate more value to the emerging digital asset markets.

The Cryptocurrency Futures Market Can Help You Lower Risk

The beauty of cryptocurrency futures is that it is complex and simple at the same time. It is secure and dangerous. The gist of the matter is that you must know what you are doing to succeed with crypto futures. If you do know how to use it, you can see that futures markets will reward you and help you take out risk within your portfolio.

This is a boon for retail digital asset speculators and for institutional digital asset managers.

The futures market can be quite intriguing.

Investors have the opportunity to dabble in these markets and generate value or they can use it as a tool to protect themselves from potential market situations. Indeed, it is worth repeating that futures are not for those who like simplicity as many aspects are a part of the futures market. If you do not have the right information, knowledge, and expertise, you can face significant losses. That is why many experts will say that even they may not touch these segments of the market because of the fact that it can burn them.

Futures are critical because it can help to minimize risk in various parts of the digital asset ecosystem.

The critical point here is to understand the essentials of futures trading. Recall that speculators in futures purchase a contract that varies on future price points, if they purchase it correctly today, they can generate value when the asset values rise. Investors can choose different assets in traditional markets such as financial vehicles or commodities. But in digital asset markets, they can choose different cryptocurrencies.

If you purchase bitcoin futures, you could have physical delivery of bitcoin in the future or you may have it in the dollar value. You win if the price of bitcoin goes up and becomes increasingly more valuable within your futures contract duration. How do you win? Well, you make money.

In essence, such a contract is where one buys an asset at a point in the future, and usually for a specific price. If the asset has such a contract, you can purchase it. It is important to know that this market enables you to also bet against digital assets. But it can also help you take advantage of volatility in more ways than one. In fact, you can bet that it can go up, or it can go down. That means you can make money on both sides.

So if you think that bitcoin will go up, you can purchase crypto futures and earn but if you think that it can go down sharply over the next month, then you can purchase a contract accordingly.

How does it help to lower risk? Well, it helps to manage volatility.

You can notice that in traditional markets, airlines will purchase oil over a longer horizon so that they can lock in a certain price and only pay that through their operations, that way they do not have to incur varying costs due to political or trade turmoil. So, if you are an airline that owns oil at a lower price when it goes up, you do not have to worry as much.

But individuals know that proper futures investing takes a while to optimize for over the long term. Individuals must know how to position it correctly so they are able to enter into the right futures contracts at the right time. If you enter at the right time when it goes up, it is good but what happens if you own it as it is going down? You didn’t profit and might have lost money.

Futures help to distance oneself from variables, market conditions, and other aspects that could affect the overall profit and loss statement. The futures market allows for direct investing into many assets without having to take risks from certain companies, stocks, or other aspects. As digital asset markets progress, investors will seek to hedge against larger aspects to conduct value preservation.

The right type of futures best help investors to input a bit more diversity into their holdings, tapping into another aspect of value.

Futures enables investors to tap into different aspects of the market as opposed to the spot markets.

The Cons

Finalizing a Contract

One necessary component is to realize that you must understand what you are purchasing or selling. Remember that futures contracts possess different inputs. These inputs are value, quantity, quality, and specified date of expiry. If you realize how you structure your contract when it will be due, and other basic aspects, you are better off.

Indeed, contracts can vary with cash or asset settlement as well. You do not want to have to respond to a situation where you have to cough up what you said you have or where you liquidate because you didn’t choose the right contract or expiry.

Time Decay

People do not think about time decay within a futures contract. But it is quite essential to think about this when you are looking at these contracts. Time marches forward no matter what. If you account for it, you can mitigate issues, if you do not, you welcome more problems.

The longer your contract goes, the more you are slowly losing value as the value of the prior day in a commodity or asset becomes less related as you get closer to the expiry. If you leave the contract and do not do anything, especially if it is out not in the money, it will disintegrate over time.

Debt or Borrowing

It is necessary to state that leverage can be your best friend or your worst enemy. If the markets move with you, great, if they move slightly against you, you can definitely lose.

Interest and Premium

You will pay a premium for bitcoin and other crypto futures contracts. You will have to understand the idea of interest parity.

Commitment

In many cases, if you are trading futures, you want to ensure that you are staying vigilant as the market can change. The price of the contract can change. So you must ensure to watch or have the right parameters set to mitigate losses if it moves against you.

Is it Possible to Automate the Futures Trading Process?

Yes, you can use bots to automate the futures trading process. It helps you to minimize emotional responses, mistakes, and other factors related to human weaknesses and issues.

What Crypto Exchanges Support Futures Markets?

You can find crypto exchanges that support futures markets at places such as:

  • Okex
  • Kraken
  • CME (not a pure crypto exchange)
  • Bitfinex
  • Huobi
  • LedgerX
  • Margex
  • TD Ameritrade (not a pure crypto exchange)
  • Binance Futures
  • Bakkt
  • Phemex
  • ErisX
  • Kucoin
  • Bitmex

There could be others.

What Strategies Are There to Trade Futures with Bots?

Here are the strategies you can use:

  • Short – You are selling contracts and thinking that the price will go down
  • Long – You are buying contracts and expecting the price to move up
  • Cash-and-Carry Futures Arbitrage – It is market neutral and can significantly decrease risk exposure. The critical point is that it aims to find and take advantage of inefficiencies.
  • Inter-exchange Premium Arbitrage – Variability of futures pricing on various exchanges, you look at it and arbitrage. Rather, you can put in the inputs and the bot would look for these.

Cash and Carry

The bot would pick up physical bitcoin at a set price. Then it would enter into an expensive price on the futures contract at a premium and go short.

Inter-exchange premium arbitrage

Find various BTC futures contracts and trade them against the other to earn the difference. Remember that one could use bots to conduct these strategies. They do carry a certain portion of risk but can pay off tremendously. It is a bit more complex, but it can certainly be fun overtime to mitigate issues and maximize value.