Like other financial markets, the cryptocurrency market offers you different trading options: you can enjoy day trading in a spot exchange while speculating on Bitcoin’s future price by buying and selling contracts on a futures market.
If you’ve had a chance to go through our “Crypto Spot Market vs. Futures Market” article, you’d probably already know about the basics of the futures market. In this article, we’re going to dive deeper and talk more about specific aspects of futures trading.
Unlike spot markets, crypto futures markets allow you to get some exposure to different crypto assets without actually holding the asset itself. Essentially, you get to trade contracts in which you’ve agreed to sell or buy the underlying asset at a predefined price and date in the future.
With futures trading, you can exercise complex trading tools to increase your potential profits which inevitably will also increase your risk exposure. Let’s see how it really works:
Margin trading is one of the main aspects of futures markets which allows you to gain access to more capital than your initial investment. It usually involves getting extra funds from your broker or other users to boost your potential profits on successful trades.
In a cryptocurrency market, other users can provide you with additional capital and receive interest. To receive this extra fund, you have to put some collateral which is called the “Margin”. After that, you can choose your Leverage rate which determines the amount of money you want to borrow.
In general, each trading platform has its own set of rules and leverage rates. A 50x leverage, for instance, allows you to borrow up to 50 times your initial trading amount. However, never forget: with higher leverage comes higher risk and you may lose all your investment in just one bad trade.
The initial margin is the amount you have to pay to open your position which is related to your leverage rate. A maintenance margin, on the other hand, is the amount you have to hold in your trading account to keep the position open.
Each trading platform has its own margin rates which you have to meet. If your account value drops below the margin requirement, you’ll receive a Margin Call which simply means that you have to add more funds to your account to increase its value. Failing to do so can result in forced liquidation.
Liquidation happens when you fail to meet a margin call and increase the value of your account. It allows your broker to close any open position unilaterally by selling some or all of your assets to cover the losses and match the minimum required amount.
Due to the high level of leverage available to you, futures trading brings in much more risk than normal trading. Forced liquidation is the major risk you may experience in the futures market which may cost you all your funds or worse; Sometimes you have to even pay extra to cover transaction fees caused by liquidation.
Aside from the risks, futures trading offers a few interesting benefits as well: