Imagine this: you strongly believe Bitcoin's price will surge in the next few months. With spot trading, you'd buy Bitcoin directly and hold it until the price rises. However, what if you could make use of leverage to amplify your potential gains with a smaller upfront cost? Enter crypto futures — a form of derivatives that's equally beloved as it is feared by the crypto community. While it might sound intimidating for beginner crypto traders, crypto futures trading may be perfect for you if you're aware of the potential gains and risks that come with trading such crypto derivatives. This crypto futures trading guide is designed for crypto-curious beginners like you, offering a high-level overview of crypto futures trading for beginners, its potential benefits and risks, and how it's different from spot trading.
What are crypto futures?
Crypto futures are essentially financial contracts between two parties that agree to buy or sell a specific amount of cryptocurrency at a predetermined price on a set future date. Instead of outrightly trading the underlying crypto assets, crypto futures are derivatives whose prices are dependent on their underlying assets.
Put simply, think of a futures contract as an agreement between you and another party to buy or sell a specific amount of cryptocurrency at a predetermined price on a set future date. In essence, with crypto futures, you're speculating on the cryptocurrency's price movement at that specific point in time.
Why is crypto futures trading so popular?
Crypto futures' popularity stems from their ability to leverage positions, meaning crypto traders can effectively trade a larger amount of cryptocurrency with less capital. This offers the potential for amplified gains, which is largely what you'll see on social media, when crypto traders brag about their massive gains because of leveraged positions. While this might not always be representative of the average crypto futures trading experience, it's a large pull factor when it comes to understanding why the average trader would want to give crypto futures trading a try. As with all forms of trading, it's crucial to remember the high risks involved: leverage in always-open market like crypto requires careful monitoring to preserve positions from getting liquidated.
How do crypto futures work?
Crypto futures are part of derivatives trading, which involves trading financial contracts that get their value from the underlying asset. In the case of crypto futures, the asset would be cryptocurrency. Unlike spot trading, where you directly buy and hold the crypto asset, crypto futures involve agreements to buy or sell a specific amount of a cryptocurrency at a predetermined price on a set future date. This means you're essentially placing a bet on the future price movement of the coin or token without actually taking ownership of the underlying asset itself. Here's how this translates into the two main positions you can take in a crypto futures contract:
Long position (bullish)
If you believe the price of the cryptocurrency will increase by the expiry date, you enter a long futures position. In the case of Bitcoin, your assumption would be that Bitcoin's price will go up. By entering a long (bullish) position, you're essentially trying to lock in a price to buy Bitcoin later at a lower cost than what you think the market price will be on the expiry date.
Short position (bearish)
Conversely, if you believe the price of the cryptocurrency will decrease by the expiry date, you can enter a short futures position. In our example, it would mean that you believe Bitcoin's price will go down. By entering a short (bearish) position, you will aim to sell Bitcoin later, at a higher price than what you think the market price will be on the expiry date.
Essentially, crypto futures function as a tool for price speculation. You're not directly buying or selling the cryptocurrency, but rather making a prediction about its future price movement and profiting if your prediction is correct. However, it's important to remember that speculation carries inherent risks. If your prediction is wrong, you could incur significant losses.
What are perpetual futures?
Similar to expiry futures that we previously covered, perpetual futures (perps) are also a type of crypto derivative that encourage speculation without the need to own any underlying assets. However, that's where their similarities end. Perpetual futures are different from expiry futures in that they don't have expiry dates and can be held indefinitely as long as the trading account possesses enough margin to prevent forced liquidations.
Another difference worth mentioning is that perps are subjected to the funding rates mechanism. Unlike their expiry counterparts that converge with the underlying asset's spot price as the expiry date approaches, perpetual futures lack such a mechanism. To make up for this, perpetual futures contracts are subjected to funding fees that keep them aligned with the underlying asset's spot price. These fees are then exchanged between long-and short parties of the perpetual futures contract.
A quick example would be if the perpetual futures price is trading lower compared to the spot price, the funding rate becomes negative. This means holders of short positions pay a fee to holders of long positions. This ultimately incentivizes long positions to enter the market, pushing the perpetual futures price up towards the spot price. The reverse would go for positive funding rates should futures prices trade higher than spot prices.
You can learn more about perpetual futures with our in-depth guide to perpetual futures contracts.
Scenarios of how crypto futures work
Still confused by the mechanics of long and short crypto futures positions? Let's use an example to illustrate how to trade crypto futures. Imagine you believe Bitcoin's price will be $60,000 in three months. You enter a futures contract to buy 1 BTC at $60,000. The contract will expire in three months. Here are two scenarios:
Scenario 1: Bullish Bitcoin (price goes up): Imagine Bitcoin's price rises to $80,000 in three months. You would then "buy" Bitcoin at the agreed-upon price of $60,000 from the seller and immediately sell it on the open market at the current price of $80,000. Your gains are the difference between the two prices, in this case $20,000.
Scenario 2: Bearish Bitcoin (price goes down): Imagine Bitcoin's price plummets to $40,000 in three months. You would still be obliged to "buy" Bitcoin at the agreed-upon price of $60,000, even though the market price is lower. You would then sell it at the current market price of $40,000, resulting in a loss of $20,000.
Crypto futures vs spot: which is better for you?
To condense the specific differences between crypto futures trading and spot trading, here's a brief overview that covers their differences for your easy reference.
Feature | Spot Trading | Futures Trading |
Ownership | You directly own the cryptocurrency | You don't own the underlying asset until the expiry date of the contract if you're trading expiry futures |
Settlement | Immediate | Settled at the expiry date of the contract |
Leverage | Maximum 10x leverage available | Maximum 125x leverage available |
Hedging | Limited hedging options | Can be used for sophisticated hedging strategies |
Ownership
Crypto futures and spot trading differ significantly in terms of ownership. With spot trading, you directly buy and own the underlying crypto asset, giving you rights like governance, voting or staking. In contrast, futures trading involves contracts to buy or sell an asset at a future date, without immediate ownership. You're essentially using these derivatives to speculate on price movements by going long or short in these contracts. While physical delivery of these crypto assets can occur at expiry, it's more common to close out the position before then to lock in profits or losses.
Settlement
Crypto spot and futures trading have contrasting settlement styles. In spot trading, settlement is immediate. You buy or sell an asset, and the transfer of ownership and funds happens instantly. Conversely, futures trading involves contracts for a settlement down the line. You agree on a price and date to buy or sell a specific asset, but ownership and capital flow only occur on that predetermined future date (or when you close your position before expiry).
One additional point to note is that perpetual futures don't have a fixed expiry date. Unlike standard futures contracts that settle on a specific date, perpetual futures keep rolling over automatically. This allows positions to stay open indefinitely without the risk of forced settlement at expiry.
Leverage
Crypto futures can be particularly intriguing because of the concept of leverage. This essentially allows you to trade a larger amount of cryptocurrency with the same amount of capital. If a platform offers 5x leverage, this means that for every $1,000 you put up as margin collateral, you're able to trade a futures contract worth $5,000 of Bitcoin. As experienced crypto traders would probably know, leverage is a double-edged sword as both gains and losses are magnified. Given the inherent volatility of the crypto markets, massive gains and liquidations could potentially happen. This is further amplified by how you're able to leverage more with futures trading compared to spot trading because of the differing margin requirements involved. With OKX in particular, you'll be able to enjoy up to 125x leverage for crypto futures trading and up to 10x leverage for spot trading.
Hedging
Hedging strategies can be employed in both crypto futures and spot trading but with key differences. In spot trading, hedging against near-term volatility might involve selling half of your spot holdings for stablecoins like USDT or USDC to offset any potential downturns. Conversely, hedging with futures could involve entering a short position to offset potential losses on a long spot holding. This is essentially a bet that the price will decrease in the short-term but appreciate in the long-term. This futures hedging strategy ultimately allows for more targeted risk management based on your predictions and is typically employed by crypto traders with large positions that they don't wish to unwind.
Crypto futures trading example
Considering getting into crypto futures trading but unsure of how to get started? Out of the many best crypto futures trading strategies available, one of the most common examples is the futures calendar spread. In essence, the calendar spread strategy involves entering two futures contracts with different expiry dates for the same underlying cryptocurrency.
For this crypto futures trading example, we'll focus on a long calendar spread. This strategy involves:
Buying a longer-dated BTC futures contract: You believe that the price of BTC will increase in the long term. By buying a contract expiring further out, you're locking in a specific price for a future date.
Selling a shorter-dated BTC futures contract: You're essentially borrowing this contract and agreeing to sell BTC at a specific price on the earlier expiry date. This contract is typically priced lower than the longer-dated one.
The aim of a long calendar spread trade is to potentially capitalize on price inefficiencies — it amounts to betting that the difference between the two contracts will narrow over time. This can happen if the price of the underlying asset increases but at a slower pace than initially anticipated. Even if the price stays relatively flat, you can still benefit from the time decay of the shorter-dated contract.
Keen on finding out what's the best way to trade crypto futures? While methods and strategies may vary, our futures spread trading guide dives into more detail about one of such trading strategies.
Final words and next steps
The world of crypto offers a vast choice of instruments to trade with. From understanding the mechanics behind crypto futures to highlighting the differences between spot and futures trading, we hope our comprehensive guide to trading crypto futures has proven useful for you. While crypto futures trading can be a powerful tool for any crypto trader to try out, it's equally crucial to prioritize risk management and education so you can protect your capital and minimize your risk.
If you're set on giving crypto futures trading a try and are considering futures trading, make sure to read our comparison guide that looks at the top platforms for trading crypto futures so you're able to make the most informed decision when selecting a platform. Additionally, check out our article that covers the fees involved with trading crypto futures so you can better plan your trades with said fees in mind. Lastly, if you're interested in automated crypto futures trading, consider reading up on our best futures trading bots guide.
FAQs about crypto futures trading
What are crypto futures?
Crypto futures are financial contracts between two parties that agree to buy or sell a specific amount of cryptocurrency at a predetermined price on a set future date.
Compared to futures trading, isn't spot trading simpler and less risky than futures trading?
Yes, spot trading is generally considered less complex and carries lower inherent risks compared to futures trading with leverage.
Are there any benefits to crypto futures trading for beginners?
For true beginners with a risk-averse nature, it's best to first gain experience and comfort with spot trading before considering futures. However, for beginners who are particularly interested in learning more about crypto futures contracts and how they function, we do offer demo trading accounts which allow you to practice futures trading with simulated funds, helping you grasp the mechanics and potential risks before committing real capital.
Is crypto futures trading profitable?
While crypto futures trading can be lucrative, it also carries significant risks, which can lead to unexpected losses if these risks are not properly mitigated.
Is it okay to use leverage if I'm a complete crypto trading beginner?
Leverage can be very risky, especially for beginners who are still unfamiliar with the nuances of crypto futures trading. The potential for magnified losses is significant. It's highly recommended to avoid leverage altogether until you have a strong understanding of market dynamics, risk management strategies, and the mechanics of futures contracts.
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