Trading cryptocurrencies isn’t always a simple case of buying a particular coin at one price and then selling it at another. Yes, that’s certainly the fundamental basis of all investments but the mechanism through which you make your moves can change. Perhaps the best example of this is futures trading. To explain more, here’s a breakdown of futures trading in the crypto world.
What is Futures Trading?
Put simply, futures trading involves purchasing forward contracts. In other words, you agree to buy an asset at a future date but at a price and quantity determined in the present. Another way to think about futures contracts is that you’re agreeing to sell someone an asset at a predetermined price by a certain date.
For example, let’s say you believe the price of Bitcoin (BTC) will hit $7,000 within the next three months. At the time you initiate the trade, the price of BTC is $3,500. Using a futures contract, you can lock in $3,500 and agree to buy BTC at that price in three months, irrespective of what it’s actual value is.
If the price increases as you predicted, you’ll make a profit. If, however, BTC is only worth $2,000 in three months, you’d be obliged to fulfil your contract and buy at a price of $3,500.
Futures vs. Buying Cryptos
Image source: Who Is Danny/Shutterstock.com
One of the most important concepts to grasp when you’re trading crypto futures is that you don’t own the underlying asset. When you use a cryptocurrency exchange such as Binance, you’re buying actual coins. In other words, you can read our Binance review, create an account and buy coins that can be sent to your personal wallet.
In contrast, crypto futures trading involves virtual contracts. This means you don’t own the underlying asset. This also means you won’t have coins that can be sent to a crypto wallet and you won’t be able to transfer them to another exchange or spend them. However, the benefit of this is that you don’t need a wallet. What’s more, you make deposits with fiat using processors such as PayPal. Finally, futures contracts are regulated by the FCA and other bodies.
How to Trade Bitcoin Futures
As we’ve said, the simple process of buying futures contracts is to say you want to purchase XX coin at YY price. However, crypto futures trading allows you to go long or short. If you go long, you expect the price of an asset to increase. Going back to the above example, you would go long and purchase a “call” option on BTC at $3,500 if you thought the price would hit $7,000 in the next three months.
In contrast, if you felt the price of BTC would decrease, you would go short. For example, let’s say the current price is $3,500 and you think it’s going to drop to $1,000 in six months. You would buy a “put” option at $3,500. This allows you to sell your coins for $3,500 in six months, while everyone else is selling their coins for $1,000.
These, in a nutshell, are the basics of crypto futures trading. Although there are some nuances when it comes to ending contracts early, the main principles we’ve outlined above will set you on the right path
Where to Trade Bitcoin Futures
To start trading futures, you will need to find a regulated provider, these differ from traditional cryptocurrency exchanges. Below is a list of the best places to buy a bitcoin futures contract.
Featured image source: Preechar Bowonkitwanchai/Shutterstock.com