How to Trade Cryptocurrency Futures: Step by Step Crypto Futures Trading Guide

How to Trade Cryptocurrency Futures: Step by Step Crypto Futures Trading Guide

May 24, 2022 Digital

Futures are investment instruments dating back to the 19th century (Chicago, 1848). They are used for trading the future price of raw materials, shares on the stock market, stock market indices and currencies, including cryptos.

So they operate under a concept very similar to stock market indices or derivative contracts in the market. They allow the crypto trader to take risks related to the future value of a digital asset. Therefore, a cryptocurrency futures contract’s value is a derivative of the digital currency it represents: Bitcoin, Ethereum or any other crypto asset.

This article will explain how you can start trading cryptocurrency futures, its risks and the practical tips you should follow to have a more positive experience.

How to Trade Cryptocurrency Futures?

Cryptocurrency derivatives offer the crypto investor the opportunity to speculate on its future price in the market. It is a financial product with the potential to expand opportunities and strengthen the cryptocurrency portfolio through leverage or capital provided by the broker/platform for trading. 

Leverage allows capital to trade more efficiently because the crypto trader can trade positions higher than the quantum of funds required. In this way, the investor obtains a greater exposure in the market and only disburses a part of the total value of a position. 

In addition, it allows to increase yields but also potential risks. In the same way, they serve for the investor to protect his portfolio or use it as a hedge when his investments in other digital assets trend in the opposite direction. 

You can go long for the price of the cryptocurrency to rise or go short and anticipate a possible drop in its price. Before you start trading cryptocurrency futures, following these five essential tips from the experts below is a good idea.

1. Adopt a trading methodology

It is crucial to adopt a cryptocurrency trading methodology that is appropriate for you. It’s not just about watching a few videos of cryptocurrency influencers telling you what to do. Remember that there are no unique or exact recipes in these markets since each trader is different. The trader should adapt the trading style to the objectives and personality traits of the investor (mentality, lifestyle, risk tolerance).

2. Develop a trading strategy

A good business plan always helps the investor to manage risk better. At the same time, it contributes to improving the consistency of the trading strategy. The trading plan requires a detailed design on entering and exiting positions.

Three fundamental aspects are entry and exit indicators, position size and where to place stop losses. There are many advantages of developing a trading strategy to take care of the investment and avoid headaches.

3. Carry out proper risk management

Proper Risk Management is the most critical part of the equation for trading cryptocurrency futures. Risk management begins with setting limits on losses on a trade. Knowing your risk tolerance is vital to trading sensibly and not risking beyond the allowed limit. 

While trading cryptocurrency futures, stop losses should be sacrosanct. Losing 10% of your capital is the outer bounds of risk you should take. Your goal is first to protect your money and then gain returns. This will help you value your money accurately, trade carefully and protect your investment.

It is not about risking everything in a single trade but having a long-term vision and strategy. For the beginning crypto trader, it is better to earn little consistently than to expect to fill up in two or three trades. This way, you can build a good cryptocurrency account and portfolio.

4. Trade responsibly

Protecting capital by trading with realistic and responsible expectations should also be part of the trading methodology. You have to control your emotions because compulsive trading induced by emotions only ensures unfortunate losses.

The trader’s instincts indeed count when investing, but you have to be measured. Trading the cryptocurrency market on lucky streaks without any technical reading or data to support the investment is not only risky but can lead to bankruptcy.

To operate responsibly, you have to control your emotions. The way to mitigate these risks is:

  • Reduce the number of operations during the established period.
  • Shorten leverage.
  • Set conservative goals and objectives.
  • Never trade with money you are not willing to lose.

5. Study constantly

Nothing is as healthy for the crypto trader as constantly learning. And the only way to achieve this is by studying and consulting with the most experienced trading professionals.

Staying informed about new and old crypto projects is vital. You have to be up to date on what’s new in the blockchain. Likewise, read about the evolution of the crypto industry, regulations in India and the world and everything that implies adding data to the analysis to invest with criteria.

Who are the main market participants in cryptocurrency futures trading?

Similar to oil or metals futures trading, Bitcoin or Ethereum futures are financial contracts between two parties, a buyer and a seller. They both agree to make a trade on an underlying market and set a fixed price for that cryptocurrency at a future date. 

The buyer is obligated to buy the underlying market, while the seller is obligated to sell the digital asset on or before the expiration date of the contract.

In the cryptocurrency futures market, there are three participating players: speculators, hedgers and arbitrageurs. 

  • Speculators: Take a position according to their perspective and market strategy.
  • Hedgers: They use crypto futures contracts to protect their investment portfolio.
  • Arbitrageurs: Take advantage of the price difference of the underlying asset in different markets.

What are the risks in trading cryptocurrency futures?

Crypto investors can choose from a wide variety of markets to trade cryptocurrency futures. There are several of them regulated like the one in the United States and some that are not like India.

In the US, Bitcoin futures are listed on the CME, a designated contracts market (DCM) and derivatives clearing organization (DCO). Both the trading and clearing of Bitcoin futures are regulated by the Commodity Futures Trading Commission (CFTC).

Investments in cryptocurrencies carry certain risks due to price volatility. Even more so in the futures market. Among the most significant risks of cryptocurrency futures trading for your assets are:

Cryptocurrency price manipulation: Unlike regulated securities markets, some countries have no efficient mechanisms to prevent price manipulation. 

Liquidity: Some cryptocurrencies do not have the necessary liquidity on exchanges or on the chain. This is especially true when the cryptocurrency has minimal circulation among retail or professional investors.

Use as a method of payment: Cryptocurrencies are not yet recognized as legal means of payment in contrast to other digital means, except in El Salvador or the Central African Republic. Although many businesses do accept them, their acceptance is not mandatory.

They are very volatile assets: They do not allow them to be used as a unit of account and store of value, unlike fiat money (INR, dollar, euro, yen).

Its cross-border nature can be a problem: The companies in charge of issuing, guarding, and trading cryptocurrencies are not located in India. In many cases, it is not even known where they will be able to resolve any legal conflict.

Susceptible to theft, fraud or loss: Blockchain technology is secure, but how individuals manage their wallets is an area of concern. There is a risk of loss or hacking of private keys is prevalent. Whether you forget them, manage them personally or are in the hands of third parties.

Arbitrage in Cryptocurrency Futures Trading

It is an option to speculate on digital assets to achieve higher profitability. This activity consists of taking advantage of the difference (spread) of prices of cryptocurrencies between the different exchange platforms in India. Prices vary as a result of the supply and demand of crypto assets.

The cryptocurrency arbitrage strategy is possible because digital asset prices vary from one exchange platform to another. Thus, the trader can make a profit with the price variances he detects in the market to buy and sell cryptocurrency futures.

Generally, exchanges with more liquidity offer better prices. At the same time, those with less liquidity have higher prices. These environments are not exempt from fraud and scams either.

Tips to Follow for Beginners

For a better experience with futures contracts, the beginner should keep the following in mind when investing:

  • Before starting to operate, study the futures market and enter with the help of an expert.
  • Look for a known crypto platform that is legally established in the country.
  • Use leverage carefully.
  • Don’t risk what you don’t have or aren’t willing to lose.
  • The high price volatility of cryptocurrencies is a benefit but also poses great risks, so trade wisely.
  • Implement a solid strategy for risk management. That will give you peace of mind.

Conclusion:

Futures contracts are one of the best options to trade in the crypto market. They can make large profits by having the opportunity to sell high and buy low. Of course, have a plan in place.