Those looking to capitalize on the future rate of a particular crypto asset without possessing it, use crypto futures tools, supported by large and credible exchanges like Binance Futures, the WhiteBIT cryptocurrency futures exchange, and others. By making these financial contracts, traders can agree with another party where they will exchange cryptocurrencies at pre-set prices and times in the future, making for potentially high profits. Let’s see how it works in the example.
An Example of Crypto Trading Futures
The Blockchain Academy becomes an essential resource in the context of Crypto Futures: What They Are and How They Work?” This academy offers specialized courses that delve into the mechanics of crypto futures, covering concepts such as contract types, trading strategies, and risk management. By enrolling in the Blockchain Academy, individuals can gain a deep understanding of crypto futures, empowering them to navigate this complex financial instrument with confidence and informed decision-making. Suppose, a trader anticipates that the value of Bitcoin will surge in the near future. Then, one can take a long position on a BTC futures contract, essentially agreeing to buy an agreed-upon amount of BTC at a pre-agreed cost and time down the line on a crypto futures exchange.
Take, for example, a trader who purchases a one-month BTC futures agreement priced at $50 000 per coin. If the cost of BTC grows to $60 000 during that month, the trader can then sell his contract and make a handsome profit, pocketing the difference between purchase ($50 000) and sale ($60 000) prices.
Conversely, if Bitcoin’s price diminishes in the designated month, the trader may be forced to sell their futures contract at a loss. To illustrate this, say that after buying one BTC for $50 000 its value drops to $45 000, resulting in a five thousand dollar deficit per coin.
Now it’s time to talk about the challenges every trader faces in crypto futures trading:
- Margin. To initiate and maintain a futures position, traders must deposit specific funds with the respective futures exchange. This is known as margin and is expressed in terms of a percentage of the total value of their contract. For instance, if there’s a 10% margin requirement for trading Bitcoin futures contracts worth $100 000 each; then you’d need to set aside $10 000 from your capital investment fund as security against any potential losses on that trade. For traders, the possibility of a market downturn can be especially risky. If the cost of their cryptocurrency falls below an exchange’s required margin level, they may receive a dreaded “margin call,” which demands additional funds to maintain their position. This can often mean having to add more money into one’s margin account or risk closing out your trade prematurely and at a loss.
- Liquidation. A failure to meet the margin call could force a trader’s position into liquidation – a process whereby an exchange would sell the contract in order to recoup any owed funds. This unfortunate result, however, can prove costly for traders as they might be forced to accept prices lower than their original entry fee. Liquidation may thus cause huge losses and bear the considerable risk of financial damage.
To avoid margin calls and liquidation, investors should ensure they maintain an adequate level of margin in their account and vigilantly watch the price movement of the underlying asset. Additionally, they can utilize risk management tools such as stop-loss orders to limit any possible losses.