Futures (Crypto)

In crypto, futures are contracts between two groups of people with opposing market views (bullish and bearish). Both these groups trade against each other via an exchange and the more accurate someone’s prediction is, the better they can earn.

However, gains and losses here are very leveraged, meaning you can earn several times more (or lose) if your predictions are accurate (or wrong).

All crypto futures are based on the price of real assets like Bitcoin, Ethereum, and other cryptocurrencies.

How Does Future Trading Work?

Future trading depends on the accuracy and the degree of accuracy that traders predict.

1. Scenario

Suppose, there are two groups of traders with opposing views. Group 1 thinks that Bitcoin will crash down from $61,000 and Group 2 thinks Bitcoin will surge up from $60,000.

2. Entering Into Contracts

These two groups will enter into a futures trade with a 10x leverage which means they can reap the same gain as trading with $60,000 but only with $12,000.

This is why futures trading is lucrative, it allows for far greater gains that a certain amount of money can make without leverage. Obviously, there are 5x risks as well in this scenario.

For the sake of simplicity, let us assume both groups have same number of traders.

3. Taking Positions:

All traders in Group 1 will offer to sell (i.e., go short) 10x Leveraged Bitcoin Futures and Group 2 will buy(i.e., go long) the same future contracts with the same 10x leverage.

4. Situation Plays Out

Let us now see what might happen:

1. If Bitcoin Moves to $61,000:
   • Group 1 loses $10,000 (10x Leverage).
   • Group 2 gains $10,000 (10x Leverage).
   • If Bitcoin Rises Further: Group 1 will keep losing till their traded money is there ($61,200). After that, they will be forcibly liquidated.
2. If Bitcoin Moves to $59,000:
   • Group 1 gains $10,000 (10x Leverage).
   • Group 2 loses $10,000 (10x Leverage).
   • If Bitcoin Falls Further: Group 2 will keep losing till their traded money is there ($58,800). After that, they will be forcibly liquidated.

6. Liquidations

Liquidation happens when your account no longer has enough funds to support a leveraged trade. In crypto futures trading, if the market moves against your position and your margin (the amount you’ve set aside for the trade) isn’t enough to cover potential losses, your position will be forcibly closed. This is called liquidation.

This system exists to protect traders and exchanges. When losses become too large, there’s a risk that the trader might not be able to cover those losses, either because they run out of funds or for other reasons. Liquidation prevents this by automatically closing the trade before losses grow even larger.

In the above case, groups 1 and 2 bets with 10x leverage which means their $12,000 margin can only cover about $12,000 in losses till the price moves $1200 in either direction.

Pros and Cons of Future Trading

Pros

• Leverage: Allows control of larger positions with less capital.
• Profit in Both Markets: Can profit from both rising (long) and falling (short) markets.
• No Need to Own the Asset: Speculate on price movements without holding the actual cryptocurrency.
• Hedging: Protects against price swings in a volatile market. This is used by large investors to protect capital during volatile markets.
• High Liquidity: Futures markets generally offer deep liquidity, making trades easier to execute.
• 24/7 Trading: Crypto futures can be traded around the clock, unlike traditional financial markets.
• Perpetual Contracts: No expiration for perpetual contracts, allowing indefinite holding.
• Potential for Quick Gains: Amplified profits due to leveraged positions in short-term trades.
• Lower Trading Fees: Futures contracts often have lower fees compared to spot markets.
• Transparency: Prices are usually tightly linked to the underlying spot market, reducing manipulation risk.

Cons

• Risk of Liquidation: High leverage increases the chance of losing your entire margin.
• Amplified Losses: Losses are also magnified by leverage, which can exceed your initial investment.
• Complexity: Requires a deeper understanding of market dynamics and risk management. We have seen people lose in futures and options simply because they are not able to gauge how much they can lose.
• Funding Fees: Perpetual contracts have funding rates, which can add costs over time.
• Market Volatility: Rapid market movements can trigger liquidation or margin calls.
• Overtrading: Leverage can encourage excessive trading and risk-taking.
• Margin Requirements: Constant need to maintain enough margin to avoid liquidation.
• No Ownership: You do not own the underlying crypto asset, so you miss out on long-term gains if the asset appreciates.
• Emotional Stress: A high-risk environment can lead to emotional decision-making.
• Regulatory Risks: Futures trading may face tighter regulations, varying by region.

10 Future Trading Tips From a 9 Years Seasoned Trader

I have been trading in the markets since 2015 and over the years have developed some techniques that can yield better profits and in the worst-case scenarios, stop you from losing more.

1. Always place a stop loss. These are levels that you can enter while placing a trade so that your trade is liquidated (stopped) before it loses too much money.
2. Calculate Before Trading: As mentioned earlier, most traders lose money because they are not able to gauge their losses.
3. Practice: Most profitable traders always practice more before they trade with new chart models or before they use new indicators.
4. Wait For The Opportunity: The beauty of Futures trading is that it always has opportunities lined up. Markets will always test your patience.
5. Don’t Trade Daily: Compulsive daily trading is equally as dangerous as it gets. It blinds your decision-making and forces you to take more risks. This is the same reason I lost a good amount of money in an hour in March 2017 while trading in a bus.
6. Don’t Revenge Trade: If you are trading to recover your losses, you are more likely to make riskier trades and lose even more.
7. Study Your Charts Well: Unless you get multiple confirmations, never trade based on a single indicator. Chances are that you will end up losing on a false sign.
8. Prepare For Losses: Just like profits, losses are a part of your trading journey. As long as you are making a net gain at the end of the month or year, don’t take tension.
9. Learn Firefighting: Firefighting is managing the trade after it goes wrong and is done to save capital. For example, if your trade is losing severe money in a false breakout or breakdown, reduce the leverage so that it has enough space to limit your losses after the false breakout or breakdown ends.