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A Guide to Popular Strategic Investments on Crypto Futures

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A Guide to Popular Strategic Investments on Crypto Futures

Futures are a prominent sort of cryptocurrency derivative that institutional investors typically use. Experts can use crypto futures’ data to forecast future price changes and market sentiment.

Depending on future price fluctuations, traders may profit or lose. For example, if Bitcoin trades at $45,000, an investor might trade futures contracts in anticipation of a price change.

To build a successful crypto-future strategy, you need to understand what they are and how they work. This article aims to introduce you to the world of crypto futures.

The information in the following sections is not financial advisory. Therefore, you should always perform your research on the matter.

Trading crypto futures

In many aspects, crypto futures trading differs from spot trading. However, the central notion you need to remember is that you do not own coins when you buy a crypto future.

This notion may sound counterintuitive but think of it simplistically. Traders seek to acquire or sell derivatives contracts reflecting the value of crypto in the future.

Futures trading allows investors to bet on a cryptocurrency’s future worth. For example, traders can go long to bet on a price rise in the future or short in the opposite case.

As you may have heard, financial leverage is one of the most famous advantages of futures trading. Because traders do not have to lock up whole quantities of capital, leverage allows for higher capital efficiency.

However, it would be best to be cautious when using leverage in your portfolio. In some cases, traders may lose money they do not own.

For individuals new to futures trading, a leverage of 2x or 5x can be a good starting point. Some trading platforms allow you to open a demo account to play around with virtual funds.

The advantage of using a demo account is that you can learn how to trade crypto futures directly on the market. Remember: while financial knowledge is fundamental to investing money, experience is the best teacher.

Typically, traders employ crypto derivatives as a defensive hedge for their portfolios. But how does this approach work? Let us imagine two cases:

  • Hedging a long position: you may include a futures contract in your portfolio if your coin prices fall. If you short the futures contract, you may cover your loss.
  • Hedging a short position: the opposite mechanism can work if you are betting on a crypto price collapse. Buying a futures contract at a higher price should hedge the risk of a bull market.

Furthermore, because the futures are cash-settled, there is no need for a crypto wallet. Therefore, in this transaction, there is no actual exchange of cryptocurrencies.

Keeping cryptocurrencies in custody may be costly and contribute to the overall financial expenditures of your family. Finally, remember that futures contracts have position and price restrictions. The mechanism limits investors’ risk exposure to a specific asset class.

Why do traders use crypto futures?

Investing in crypto futures opens up more possibilities for portfolio growth. Said the leverage in futures trading may quickly double a portfolio’s value in a single transaction. But again, keep in mind that using leverage is highly risky.

Hedging, as previously indicated, is another motivation to invest in futures contracts. However, protecting a portfolio, especially with cryptocurrency, may take time, even for a professional.

When assets move the wrong way, hedging an investment is a solid defense line for any portfolio.

Spot transactions on the crypto market benefit the investor when the price rises. Futures traders, instead, may earn money by shorting the market when the quotes fall.

This strategy grants investors greater flexibility and freedom to speculate. However, considering futures’ complexity, you need high financial knowledge and experience to trade them.   

Discovering Bitcoin futures

Bitcoin futures provide a variety of goals for various parties in the BTC ecosystem. Futures are a way for miners to lock in prices that guarantee a return on their mining investments.

Bitcoin futures can help investors protect their positions in the spot market. For example, traders betting on BTC prices rising in the spot market may decide to short its futures.

Consequently, they stand to profit even if the BTC price swings in the opposite direction of their spot wager. Bitcoin futures can also benefit speculators who often enter and exit futures bets for short-term profit.

Unlike the actual crypto, Bitcoin futures operate under the Commodity Futures Trading Commission (CFTC) regulation in the United States. So if you feel safer trading in a fully regulated market, Bitcoin futures may catch your interest.

Bitcoin has traded outside the confines of regulation for most of its brief history. However, some investors may consider BTC too risky, so futures may attract this new group of traders.

Bitcoin futures – a simple example of a strategy

A trader must first consider the contract’s maturity when trading Bitcoin futures. Crypto derivatives exchanges often provide weekly, bi-weekly, quarterly, and other choices.

For example, imagine you buy 45,000 futures contracts at $1 on Bitcoin. Supposing the BTC price is $45,000, you indirectly invest in 1 BTC.

You can gamble on Bitcoin’s price growing (going long) or declining (going short). In any situation, the exchange platform will pair the trader with someone betting oppositely.

When the contract reaches maturity, one trader will have to pay up. As you may guess, the trader who lost the bet will be the one to pay.

Final thoughts

For many people, futures trading is a difficult task. However, understanding how the market changes and adjusts over time takes time, and it could not be otherwise.

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Many new traders struggled to establish their bearings and finally crashed. For this reason, it is critical to approach each transaction with a strategic mindset.

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Born in Italy, Gianluca is a finance and data specialist, coming from an academic education at Sorbonne University in Paris and a career as Senior Advisor at Ernst & Young in the Banking and Blockchain sector.

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