With projects like Hamster Kombat making waves in the crypto scene, it’s no surprise that millions of users are anticipating the Token Generation Event (TGE) that’s on the horizon. Even though the airdrop has yet to happen, this doesn’t mean eager crypto traders need to sit on the sidelines. Enter crypto pre-market futures — a new way for traders to trade tokens before their TGE by speculating on its price by using derivatives.
Curious as to how they work and how they differ from traditional crypto pre-market trading? From explaining what crypto pre-market futures are to highlighting the potential benefits and risks of trading them, here’s everything you need to kickstart your trading of crypto pre-market futures.
TL;DR
Crypto pre-market futures allows for the trading of pre-TGE tokens that aren’t yet officially available for trading.
The idea of trading pre-listing tokens came around because of the anticipation behind popular projects like Jupiter and LayerZero.
By incorporating derivatives with expiry futures, traders can enjoy improved liquidity and more affordable trading fees.
Pre-market futures differ from traditional crypto pre-market trading by accounting for the counterparty risks and liquidity issues that tend to occur during instances of P2P crypto trading.
Crypto pre-market futures trading is favored among crypto derivatives traders because they allow the use of margin for leverage trading and offer tighter bid-ask spreads thanks to increased liquidity.
What are crypto pre-market futures?
Crypto pre-market futures are derivatives that give crypto traders the opportunity to trade tokens that aren’t yet available for trading. This is achieved with crypto futures, which allow crypto traders to speculate on the prices of these pre-TGE tokens without ownership of the assets. Ultimately, this derivatives-based trading model empowers crypto traders by offering better liquidity and lower fees compared to their traditional peer-to-peer (P2P) pre-market trading counterparts.
Why is crypto pre-market trading so popular?
If you’re familiar with popular crypto projects like Jupiter and LayerZero, you’ll know that there was plenty of excitement leading up to their TGE. From Jupiter’s plan of aggregating liquidity sources across Solana to LayerZero’s innovative omnichain interoperability capabilities, the projects attracted much attention from traders excited to see how the teams could potentially deliver on their vision. With total trading volume ranging in the millions, these pre-token launch periods often witnessed significant price fluctuations as anticipation built among speculative crypto traders.
You might be wondering why the crypto pre-market trading phenomenon was so popular. In short, crypto pre-market trading allows traders to capitalize on this volatility by providing a platform to speculate on token prices before their official launch. As a result, crypto traders who are up-to-date with the latest news can potentially lock in their gains by being ahead of the market and trading these tokens before they're officially listed on CEXs and DEXs.
Pre-market futures vs traditional pre-market trading
Now that we’re clear on what crypto pre-market futures are and have seen the impact of their popularity with some pre-market trading examples, let’s establish a better understanding of how pre-market futures compare to traditional pre-market P2P trading. This should help to clarify the similarities and differences between the two, so you can decide which fits your trading preferences best.
How traditional pre-market trading works
Pre-market trading in the crypto scene may seem contradictory given that the crypto markets are open 24/7. In this case, pre-market trading refers to the trading session that occurs before the crypto project becomes available for trading across crypto exchanges. Like its TradFi counterpart, this period often has more volatility given the low trading volume as market participants react to macro news, project announcements, and other factors that may influence crypto prices. However, the key difference lies in the P2P nature of crypto pre-market trading. Rather than being traditionally facilitated through order book systems, which CEX traders may be used to, crypto pre-market trading often takes place on over-the-counter (OTC) markets as users engage in direct negotiations.
The associated risks with this P2P approach
While the pre-market P2P trading approach allows for early trading opportunities of setting up individual quotes and matching trades, it can introduce situations where price quotes greatly differ from the price of the token once they’re officially listed. Although collateral forfeits are put in place by existing P2P markets, it may not necessarily deter sellers from failing to deliver on time if the price quote disparity ends up being wide enough for sellers to forego the trade entirely. This added degree of complexity introduces counterparty risks and potential liquidity issues for both buyers and sellers.
How do crypto pre-market futures work?
Pre-market futures improve upon this by offering a more structured trading environment. Unlike the P2P nature of traditional pre-market trading, the futures contracts offered are standardized agreements that are similar to the expiry futures that crypto traders are used to dealing with. With a six-month expiry that commences from the project's TGE date, traders can freely trade the pre-market expiry futures contracts until this date. After this expiry date is reached, no more orders can be placed while existing open positions will be settled. All in all, this expiry futures system ensures transparency, liquidity, and price discovery, making it easier for traders to participate without the counterparty risks and liquidity issues inherent in P2P transactions.
Benefits of pre-market futures trading
Pre-market trading can offer several potential advantages, including:
Early access to market movements: Savvy crypto traders can capitalize on price trends before the tokens become available to the broader market with CEX or DEX listings.
Potential for greater gains with leverage: As traders are buying and selling expiry futures contracts, opportunistic crypto traders can employ the use of up to two times the margin for even greater potential gains (or losses).
Tighter bid-ask spreads due to increased liquidity: Futures markets generally have higher liquidity compared to P2P spot markets because of the margin requirements involved. This allows for smoother order execution and better trade fills because of the tighter bid-ask spreads involved.
Risks of pre-market futures trading
While trading pre-listing tokens can be lucrative, there are certain risks you need to be aware of before you commit your time and funds.
Potential margin calls: As an inherent risk of trading crypto futures, trading crypto pre-market futures may lead to margin calls and liquidations if you’re unfamiliar with the use of leverage. As such, engaging in pre-market futures trading requires you to be fully aware of margin mechanics.
Project failure: While unlikely, TGEs may be delayed or canceled entirely due to a project’s failure to deliver on time. In the event of this happening, the futures contract’s expiry and settlement date will be updated.
Tips for crypto pre-market futures trading
While there’s no foolproof method of guaranteeing successful crypto pre-market futures trading, doing so with a thorough strategy of doing your own research and conducting detailed market analysis will improve your odds for success. Here are some key considerations regarding market analysis and researching the project's fundamentals.
Social media presence: A strong community is often one that drives hype and interest in the crypto project. Gauge the amount of activity on social media to judge if there’s any engagement among the community.
Project roadmap: Read up on the project’s future plans to take into account the team’s ability to deliver after the TGE.
Existing financial backing: Do a check on current partnerships to see if there are any renowned institutions or venture capitalists backing the project.
Positioning within the competitive landscape: Assess the project’s position within the market it’s competing in and its potential for growth within the space.
Tokenomics and utility: After it's been officially announced, understand the token’s purpose, supply, distribution, and potential use cases before committing to trading the pre-listing token.
Final words and next steps
Crypto pre-market futures offer both opportunities and challenges. By understanding how they work, developing a solid trading strategy, and managing your risks effectively, you can increase your chances of success in the pre-market trading space. The pre-market futures model ultimately aims to adapt and refine the existing popularity of pre-market P2P trading by offering a derivatives market that offers improved trading liquidity and more affordable prices regarding trading fees.
Interested in exploring the world of pre-market derivatives yourself? Give crypto pre-market futures trading a try.
FAQs
Crypto pre-market futures are expiry futures which allow for the buying and selling of pre-listing tokens of popular projects that speculative crypto traders are interested in trading early.
While it's possible to start with crypto pre-market futures, the tactic is generally recommended for crypto traders with some experience in spot and futures trading because of the volatility and risks involved.
While both involve trading before the regular market opens, crypto pre-market futures are derivative contracts that allow you to speculate on the future price of a token with expiry futures. This is compared to traditional crypto pre-market trading, which involves the use of peer-to-peer and over-the-counter mechanics.
Leverage amplifies both potential gains and losses. While it’s popular for greatly multiplying your gains, it also increases your risk of liquidation if the market moves against your position. As such, you should only use leverage when you’re experienced with the overall mechanics of margin and leverage.
The regulatory landscape for cryptocurrencies is evolving rapidly. As such, it’s essential to stay informed about the regulations in your jurisdiction since some regions have specific rules for crypto futures trading.
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