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Top 10 Crypto Futures Trading Benefits For Beginners

Written by Charles

Written by:

Charles

Twi

Hey there Experience: None

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Expert Reviewed

This article has been reviewed by crypto market experts at SCM to ensure all the content, sources, and claims adhere to the highest standards of accuracy and reliability.

Last Updated on June 6, 2024

Crypto futures trading allows you to speculate on the future price of cryptocurrencies, such as Bitcoin, without physically owning the assets.

This financial instrument is a contract to buy or sell a specific cryptocurrency at a predetermined price at a specified time.

One of the primary benefits of engaging in futures trading is the ability to hedge against price volatility.

By locking in prices through futures contracts, you can manage your exposure to risk more effectively, which can be particularly valuable in the often volatile crypto markets.

Understanding the advantages of crypto futures trading is critical for developing a robust investment strategy.

Regulation plays a key role here, as futures are typically traded on regulated exchanges, providing a layer of security and legitimacy not always present in direct cryptocurrency transactions.

This regulated environment offers more assurance and a structured market with more transparent pricing.

Additionally, futures trading can be executed with leverage, allowing you to control a considerable contract value with a comparatively small amount of capital.

This leverage can amplify gains, but you should be aware of the increased risks associated, as it can also amplify losses.

#1. Leverage

leverage trading

When you engage in leverage with crypto futures trading, you’re essentially using borrowed capital to gain greater exposure to the market with a relatively minor amount of your funds.

In this context, leverage is the ratio of your funds to the borrowed funds. For instance, a 10:1 leverage ratio means that for every $1 of your capital, you control a $10 position.

This tool can amplify your trading power, but it is a double-edged sword. With increased exposure, the potential for higher returns grows because any price movement is magnified.

But this also applies to losses—small market shifts can lead to significant losses, potentially exceeding your initial investment.

Here is an example of leverage calculation:

Margin Percentage Leverage Ratio
2% 50:1
5% 20:1
10% 10:1

 

  • Leverage = 1 / Margin Percentage

Therefore, a 2% margin corresponds to 50 times leverage. With a $1,000 investment, you could hold a $50,000 position in the market.

While leverage allows you to make sizable trades with limited capital, it’s essential to approach leverage cautiously. Risk management is crucial—you should consider setting stop-loss orders to protect your investment from extreme volatility.

Understanding the leverage mechanism thoroughly will equip you to make more informed trading decisions and harness its potential for expanding your trading strategy effectively.

#2. Liquidity

In crypto futures trading, liquidity refers to the ease with which you can enter and exit positions, a foundational aspect that facilitates the smooth functioning of the market.

High liquidity in these markets is characterized by many buyers and sellers at any given time, ensuring that trades can be executed swiftly.

Benefits of high liquidity in crypto futures include:

  • Quick Transactions: Liquidity enables you to buy or sell contracts rapidly, optimizing your strategy to capitalize on market movements.
  • Price Stability: A liquid market is less prone to volatile price shifts, offering you a more consistent and expected trade environment.
  • Narrow Spreads: The gap between the buying and selling price, known as the spread, is typically tighter in liquid markets, reducing your trading costs.

When considering your investment strategy, it’s essential to acknowledge that futures contracts, due to their trading volume and interest from participants across the globe, often exhibit higher liquidity than spot markets.

This high liquidity suggests that you can enter and exit the market with minimal slippage—the discrepancy between the expected price of a trade and the executed price.

While the crypto market may inherently carry risks, including volatility and regulatory changes, the liquidity of crypto futures trading can afford you a level of skill in managing your investments and achieving desired outcomes.

#3. Price Discovery

When you trade crypto futures, one of the critical benefits you encounter is price discovery. This process is crucial for determining the expected future prices of cryptocurrencies.

Price discovery involves the interaction between buyers and sellers as they negotiate and execute trades. These trades’ equilibrium reflects the current consensus on an asset’s value.

In futures trading, you’re considering present prices and predicting future prices.

The futures market aggregates various perspectives and information, leading to a more informed and consensus-driven cryptocurrency price. This is facilitated through the mechanism known as price optimization.

Here are the significant components of this process:

  • Buyer and Seller Interactions: Continuous exchange between buyers and sellers gives a dynamic and constantly updated price expectation.
  • Information Assimilation: Futures markets consolidate new information quickly. Thus, prices can rapidly adapt to the latest market developments.
  • Market Efficiency: The involvement of institutional investors and mechanisms such as futures trading contribute to enhanced liquidity and a more efficient market.

This role played by futures trading is essential for price discovery and the overall stability of the cryptocurrency market.

It provides a grounded framework to make informed decisions, hedge against potential market volatility, and manage investment risks effectively.

Futures contracts also help bridge the gap between current demand, supply dynamics, and future expectations. Understanding the futures market allows you to gain insights into the broader market sentiment and adjust your strategies accordingly.

#4. Hedging

hedging in crypto trading

When engaging in cryptocurrency trading, you frequently face significant price volatility. To mitigate this risk, you can employ hedging as a strategic tool.

Crypto futures allow you to lock in a price for the underlying asset at a future date. Here’s how it works:

  • Leverage: Using leverage through margin trading, you enhance your buying power, taking more prominent positions with less capital.
  • Risk Management: Your primary goal with hedging isn’t to profit but to protect your investments against potential losses.

Imagine you hold Bitcoin and anticipate a decline in its price. You can hedge by taking a short position in Bitcoin futures. If the price drops, the gains from the futures position can offset the losses in your Bitcoin holdings.

Hedging Strategy Implementation
Short Position Protects against price decreases
Long Position Protects against price increases

By taking a counterposition, the gains on your hedging position should neutralize the losses from the leading position.

Example Scenario:

  • You own 1 BTC at $40,000.
  • Expecting a drop, you enter a futures contract to sell 1 BTC at $40,000 monthly.
  • BTC drops to $30,000.
  • The gain offsets your loss in BTC value contracts.

You can effectively manage your exposure in a highly unpredictable market through such strategies. Remember, while hedging can minimize losses, it also requires careful planning and consideration of transaction costs.

#5. Lower Risk of Price Manipulation

Due to the nature of their design, crypto futures trading can often present a lower risk of price manipulation when compared to spot markets. Here’s why:

Structured Oversight: Crypto futures are often traded on regulated exchanges. This regulatory oversight means stricter monitoring and compliance requirements, which can deter potential manipulators.

Price Discovery: Futures markets contribute to the price discovery process, promoting a more transparent and consistent determination of an asset’s value.

Higher Liquidity:

  • Spot Market: Typically has a diverse range of liquidity, with some assets being thinly traded.
  • Futures Market: Tends to aggregate more liquidity, which can make it more challenging for individuals to influence prices significantly.

Market Participants:

  • Spot Market: Dominated by retail investors.
  • Futures Market: Attracts retail and institutional traders, leading to a broader mix of market players and mitigating undue influence by single entities.

Settlement Prices:

  • Futures contracts establish prices at specific intervals, which can smooth out the price rather than relying on the immediate supply-demand balance in spot trading.

#6. Trading on Different Market Conditions

Bull Versus Bear Markets

When engaging in crypto futures trading, you have the flexibility to speculate in varying market conditions. Whether the market is in an upward (bullish) or downward (bearish) trend, futures trading gives you the tools to profit in both scenarios.

You may consider going long in a bullish market where prices are expected to rise. This involves buying futures contracts with the expectation that the asset’s price will be higher at the contract’s expiration. If your speculation is correct and prices rise, you can sell the contracts at a profit.

  • Bullish Strategy:
    • Buy Futures Contracts
    • Expect an Increase in Value
    • Sell at Maturity for Profit

#7. Speculating in Bearish Markets

Conversely, in a bearish market, when prices are anticipated to decline, going short allows you to sell futures contracts. You would then aim to repurchase them at a lower price before the contract expires, profiting from the price difference.

  • Bearish Strategy:
    • Sell Futures Contracts
    • Anticipate a Decrease in Value
    • Buy Back at Lower Prices

Crypto futures trading gives you the strategic advantage of adjusting positions according to market sentiment and trends. Your techniques can be mirrored for both market increases and decreases, allowing you to manage risks and seek rewards across diverse market conditions.

#8. Cost Efficiency

When engaging in crypto futures trading, one of the primary advantages you will notice is the lower transaction costs than other forms of trading. The unique structure of futures contracts allows for more cost-effective trading strategies.

Futures Contract Trading vs. Spot Market Costs

  • Transaction Fees: Futures contracts often have lower fees than spot market trades.
  • Leverage: Using leverage responsibly can increase your exposure without increasing the initial costs.

Trading in the future does not require you to hold actual cryptocurrency assets. This can lead to substantial cost savings in several ways:

  • Storage Costs: Avoid the expense of digital wallets or cold storage solutions necessary for holding cryptocurrencies.
  • Security Costs: Since you’re not holding the asset, you reduce the costs associated with security measures to protect against theft or loss.
  • Transfer Costs: Eliminate the fees typically associated with transferring crypto assets between wallets or exchanges.

Capital Efficiency

  • Less Capital Outlay: You can control a substantial position in the market with a relatively small amount of capital upfront due to leverage.
  • Opportunity Cost: Your freed-up capital from lower initial outlays can be deployed elsewhere for diversification or other investment opportunities.

#9. Access to Regulated Markets

Choosing a regulated market can significantly bolster your investment confidence and security when you engage in crypto futures trading.

Regulated markets are overseen by governing bodies, ensuring transparency and adherence to established rules that unregulated markets may lack.

Transparency:

  • In regulated markets, you have access to comprehensive data on trading activities.
  • Regulations ensure that these platforms disclose accurate pricing, trading volumes, and market depth.

Reduction of Fraud:

  • Oversight by an authoritative entity, such as the Commodity Futures Trading Commission (CFTC), minimizes the risk of fraudulent activity.
  • Regulated exchanges implement rigorous standards for both operational conduct and the integrity of financial reports.

Regulatory Frameworks:

  • Contribute to a stable trading environment by enforcing strict compliance protocols.
  • Aid in maintaining fair competition, benefiting you by deterring market manipulation.

Trader Confidence:

  • Knowing a regulatory framework in place can lead to greater peace of mind.
  • You can operate with the assurance that the platform adheres to strict guidelines designed to protect your interests.

#10. Availability of Various Products and Platforms

You can access various financial products in the dynamic world of crypto futures trading. Perpetual contracts, for instance, are perpetual, meaning they don’t have an expiration date.

This allows you to hold positions for as long as needed, subject to funding rates. In contrast, options on futures are a type of derivative that gives you the right, but not the obligation, to buy or sell the underlying crypto asset at a predetermined price.

The landscape of trading platforms is equally diverse and sophisticated.

Many platforms offer differing leverage levels, cryptocurrencies, and fee structures tailored to your trading preferences. Below is an overview of some notable features found across multiple platforms:

  • Leverage Options: Ranges from moderate (e.g., 50x on Kraken) to incredibly high (up to 200x on platforms like MEXC).
  • Cryptocurrency Variety: Platforms support a broad range of cryptocurrencies, from major ones like Bitcoin and Ethereum to altcoins like Dogecoin and Chainlink.
  • Fee Structures: Competitive fees are a norm, with some platforms offering lower maker fees or unified fees across different futures markets.

In pursuing technical excellence, these platforms often have advanced trading tools and user-friendly interfaces, enhancing your trading efficiency and decision-making process.

The technological prowess of platforms ensures not only a seamless trading experience but also provides you with the necessary data analysis tools to inform your trades.

The expanding ecosystem of platforms and products is a testament to the ever-evolving nature of the crypto market, providing both opportunities and variety to meet your trading needs.

#11. 24/7 Trading

One of the distinctive benefits you can enjoy with Crypto Futures Trading is the 24/7 market access. Unlike traditional financial markets, the crypto market operates continuously and has specific opening and closing times.

This round-the-clock trading allows you to respond promptly to market fluctuations and economic events as they unfold globally, regardless of your time zone.

  • Flexibility: You can trade based on your schedule without being constrained by standard market hours.
  • Responsiveness: Quickly capitalize on news and events that could affect crypto prices.

Consider the following scenarios:

  1. Global News: If there’s significant economic news from another country while your local market is closed, you don’t have to wait to react. The crypto market’s 24/7 nature means you can adjust your positions immediately.
  2. Market Fluctuations: When other traders sleep, you could take advantage of price movements they haven’t seen. This can potentially lead to more strategic entry and exit points.

The non-stop operation of the crypto market through Crypto Futures Trading ensures that you aren’t missing out on opportunities simply because the market has closed.

Your ability to trade is unrestricted, empowering you to act on information and manage risks at any time. This can lead to more tactical decision-making and potentially enhanced returns.

Conclusion

Crypto futures trading is a strategic tool that has significantly influenced the cryptocurrency market.

Allowing you to engage with the market without direct asset ownership grants flexibility and amplifies your trading strategies.

  • Strategic Relevance: You can utilize futures to hedge against market volatility, thus potentially safeguarding your investments during uncertain market conditions. The availability of leverage is also essential. It enhances your purchasing power, enabling you to control prominent positions with relatively small capital. Remember, leverage is a double-edged sword; while it can magnify returns, it also increases the risk of amplified losses.
  • Liquidity and Accessibility: Futures markets often enjoy high liquidity, facilitating more accessible entry and exit from positions. This availability can provide you with smoother trading experiences and more consistent pricing.
  • Market Sentiment: Trading futures also gives you insights into market sentiment, mainly through futures’ premium to spot prices. This can act as an indicator of bullish or bearish tendencies among traders, which, in turn, informs your trading decisions.

In embracing crypto futures, you tap into a dynamic avenue that demands a keen understanding of market mechanisms.

Your success hinges on the judicious application of this complex instrument, balanced risk management, and continuous market analysis.

Engaging with futures informed, prepared, and with a clear strategy to navigate this evolving marketplace is crucial.

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