Cryptocurrency Futures: How do They Work on Exchanges?

Traders can trade cryptocurrency futures on crypto exchanges such as Gate.io which offers delivery contracts, perpetual contracts, and Quantitative strategy contracts.

Currently, Bitcoin futures are popular with traders as many crypto exchanges offer them.

Price volatility affects both the cryptocurrency future and spot market counterpart in the same manner.

Keywords: Cryptocurrency futures, crypto futures, Bitcoin futures, crypto futures trading, Ethereum futures, leverage, hedging, regulated cryptocurrency exchanges, unregulated cryptocurrency exchanges

Introduction

The majority of investors are interested in traditional investment assets such as bonds and shares because they are regulated and give them a sense of security. However, recent developments have influenced such people to invest in crypto related assets such as derivatives. Today, we discuss how cryptocurrency futures, which are a category of crypto derivatives, work on regulated and unregulated exchanges.

What are cryptocurrency futures?

Cryptocurrency futures, a category of crypto derivatives, are agreements between sellers and buyers to buy and sell an asset in the future. The agreement entails various terms which include the expiry date, units per contract and leverage.

In basic terms, futures involve speculation on the price of an asset without owning it. Thus, cryptocurrency futures are a method of speculating on the value of cryptocurrencies like ETH and Bitcoin. You can think of crypto futures as a way of betting on the prices of cryptocurrencies, whether they will rise or fall in the stipulated period. For exAmple, we have Bitcoin futures and Ethereum futures. However, the most popular cryptocurrency futures are the Bitcoin ones.

It is important to understand that the value of the futures is similar to the price of the underlying asset such as Bitcoin or ETH. However, cryptocurrency futures trading is different from spot trading in that you are not dealing with the real asset but betting on its price movement only.

The fact is that a trader can gain or lose based on the price movement of a cryptocurrency futures. As an exAmple, if the price of Bitcoin is $30,000 a trader can speculate the price to increase or decrease. If the price increased to $32,000, he/she would gain $2,000. However, if the price decreased to $25,000, the trader would lose $5,000.

For any crypto futures trade, there is always a loser and winner. This is because the trading platform pairs someone who speculates the price to rise to a trader that bets that it will decrease. In reality, the traders settle the financial gains or losses resulting from the price change of the asset.

How do cryptocurrency futures work?

The starting point to trade a crypto derivative such as Bitcoin futures is to make margin collateral. This amount would cover up for any losses you incur depending on your speculation. For exAmple, if the price of BTC falls the exchange subtracts the amount equivalent to the loss from your collateral. What this means is that you would need to add more funds if you want to make another Bitcoin price bet.

However, there are other costs you incur on the exchange which include the exchange fee and the brokerage fee. The other components of a cryptocurrency futures contract are the end date, units per contract and leverage.

Expiration date: This is the stated date when the two parties have to make a settlement. One of the parties has to sell the contract whereas the other has to purchase it.

Units per contract: Each contract should specify how much the underlying asset is worth. For exAmple, one Ethereum futures may be equal to 10 ETH, but denominated in United States dollars.

Leverage: The leverage refers to the amount of capital that a trader can borrow from the broker. It differs from one exchange to the other and is often expressed as a ratio of the trader’s collateral amount.
How cryptocurrency futures work on regulated and unregulated exchanges

You can find cryptocurrency futures on both regulated and unregulated exchanges. Regulated exchanges are governed by regulations instituted by the government. This also means that the cryptocurrency futures on the exchanges are approved by the government through the relevant agencies. The regulations and licensing are there to protect the investors.

Trading cryptocurrency futures on regulated exchanges

In order to trade crypto futures the investor should register on the exchange and wait for the approval of his/her account. Once his/her account is approved to trade the futures the exchange will establish some limits in terms of the amount and leverage for the trader. It is important to understand that the government also establishes limits on the leverage the exchanges provide.

How cryptocurrency futures work on unregulated exchanges

The situation is different when you want to trade cryptocurrency futures on unregulated exchanges. In this case, the exchanges can offer you large leverage up to 125%. This is because there is no government control on the exchange’s trading conditions. However, the high leverage also means much trading risk.

The margin amount which the exchange gives to the trader determines the trades that he/she executes. As noted earlier, the trader should have margin collateral in order to trade on the exchange. Notably, most exchanges that offer Bitcoin futures are unregulated at the moment.

Where to trade cryptocurrency futures?

Investors can buy cryptocurrency futures at different crypto exchanges such as Gate.io. Specifically, Gate.io is one of the leading cryptocurrency exchanges since it supports over 1 400 digital assets. In addition, it offers delivery contracts, perpetual contracts, and Quantitative strategy contracts which are popular future contracts.

Advantages of cryptocurrency futures trading

Cryptocurrency futures have a big role to play in the crypto sector. For instance, they are instrumental in increasing the adoption of cryptocurrencies. Let’s explore the major advantages of crypto futures in the crypto economy and the development of the decentralized finance sector.

Crypto futures increases liquidity

Crypto derivatives such as futures increase market liquidity. As a result, it becomes easy for traders to open and close positions. High liquidity reduces risks as the traders can execute their trades timeously which attracts more investors.

Mitigation of risks: Cryptocurrency futures can protect the investors’ portfolios through diversification. In addition, the futures also attract many investors to the investment platform since they reduce trading risks.

Portfolio diversification: The crypto futures create room for investors to diversify their portfolios. For instance, an individual can invest in Ethereum futures as well as Bitcoin futures.

Hedging: The cryptocurrency futures can hedge against market volatility. Hedging means opening trading positions which are opposite to the ones that you hold at that time. This is a strategy which experienced traders use to militate against potential trading risks, thereby protecting their investment. The reason is that futures help you to protect your positions using a fraction of the cost.

Low transaction costs: In general, cryptocurrency futures incur less transaction costs than spot trading. Therefore, crypto futures trading is likely to generate more profit than spot trading.

Simplicity: The process of trading crypto futures is simpler than that of trading cryptocurrency. With futures, the trader does not need to have a digital wallet which he/she should manage. The reason is that futures, such as Bitcoin futures, are cash settled contracts.

Considerations while trading cryptocurrency futures

In comparison, there are fewer platforms where people trade crypto futures than cryptocurrencies. Also, currently the number of people who trade crypto futures is smaller than those who invest in cryptocurrencies. This indicates that traders should make special considerations before trading crypto futures.

It is important to note that cryptocurrency futures may not give enough protection against price volatility. This usually occurs when the price of the spot market counterpart is volatile during a certain period. For exAmple, if the price of BTC is volatile the value of the Bitcoin futures may also fluctuate in a similar manner.

Most cryptocurrency futures are traded on unregulated exchanges. This exposes the traders to challenges which the exchanges may experience.

Conclusion

There are many crypto exchanges that offer cryptocurrency futures. A cryptocurrency future is an agreement to buy or sell a certain asset in the future. Currently, there are a limited number of cryptocurrency futures on the market. However, Bitcoin futures exist on regulated and unregulated crypto exchanges.

FAQs about crypto futures

What are futures in cryptocurrency?

Cryptocurrency futures contracts are agreements entered between two parties, buyers and sellers, to buy and sell an asset at a given price and on a specific future date. The crypto futures are an exAmple of derivatives, which are investment assets that give exposure to underlying assets such as ETH or Bitcoin.

Can you make money on crypto futures?

Yes, with crypto futures you can make money by capitalizing on changes in their prices. A trader can predict whether the price of the crypto futures will increase or decrease in the future. If you make a correct prediction you gain an amount equal to the increase or decrease in its value, depending on the direction of price movement.

Which crypto exchange has futures?

There are several cryptocurrency exchanges that have futures. Gate.io, one of such exchanges, offers delivery contracts, perpetual contracts, and Quantitative strategy contracts.

What is the futures price of Bitcoin?

The futures price of Bitcoin is the same as the value of Bitcoin at any time. This is because the Bitcoin futures track Bitcoin’s spot prices, which is its prevailing market price.