Crypto Futures Trading Explained
Trading crypto is not always a matter of buying a coin at one price and selling it at another. That is the underlying basis of any investment, but the mechanism you use to make your moves can change. A good example of this is futures trading for cryptocurrencies.
What is futures trading?
In simple terms, futures trading involves buying futures contracts. In other words, you agree to buy an asset on a later date, but at a price and quantity fixed in the present. Another way to think about cryptocurrency futures is that you agree to sell someone an asset at a pre-set price on a specific date.
For example, say you believe the price of Bitcoin (BTC) will reach $7,000 over the next three months. When the trade opens, BTC is priced at $3,500. Using a futures contract, you can lock in $3,500 and agree to buy BTC at that price in three months, regardless of its actual value at that time.
If the price rises as you expected, the position gains. However, if BTC is worth only $2,000 in three months, you are still obligated to honour the contract and buy at $3,500. The outcome can go either way, so these contracts carry real risk.
Futures trading vs. buying cryptos
One of the most important concepts to understand with crypto futures trading is that you do not own the underlying asset. When you use a spot cryptocurrency platform such as Binance, you buy the actual coins.
By contrast, crypto futures trading involves notional contracts. This means you do not own the underlying asset, and you have no coins to send to a crypto wallet, so you cannot move them to another exchange or spend them. The trade-off is that you do not need a crypto wallet: you can fund deposits with fiat using payment methods such as PayPal. Crypto futures are regulated by the FCA and other competent authorities.
How Bitcoin futures trading works
As noted, the basic process of buying a futures contract is to say you want to buy coin XX at price YY. But crypto futures trading also lets you buy or sell. If you buy, you expect the price of the asset to rise. Going back to the example above, you could buy BTC at $3,500 if you think the price will reach $7,000 over the next three months.
By contrast, if you feel the price of BTC will fall, you would take the opposite view. For example, say the current price is $3,500 and you think it will drop to $1,000 in six months. You would buy a “put” option at $3,500. This lets you sell your coins for $3,500 in six months, while everyone else sells theirs for $1,000.
That, in short, is the basics of crypto futures trading. Although there are some finer points when it comes to closing contracts early, the main principles set out above should point you in the right direction.
Risk & disclosure. This article is for educational purposes only and is not investment advice. Crypto futures are leveraged derivatives: prices are volatile and you can lose more than your initial deposit. Outcomes vary and no result is guaranteed. Do your own research and consider your risk tolerance before trading. Some links on this page are affiliate links; we may earn a commission at no extra cost to you, and this does not affect what we cover.
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