Cryptocurrencies are now very much part of the mainstream, whether people like it or not, whether they agree with this fact or not. And, so does cryptocurrency investing, trading, and other similar activities.
For most financial analysts, cryptocurrencies meant a big step in their trading skills, for investors, it probably meant a bigger challenge than they anticipated, while for some, cryptocurrencies meant the possibility of getting rich or losing everything, fast.
If you consider yourself to be an average crypto trader and you want to improve your skills, and maybe try your luck at something new and exciting, then crypto futures trading might just be what you are looking for.
However, in order to grasp the basics of the concept, besides having some basic financial knowledge, one also needs to understand the difference between crypto futures and traditional futures, exactly as one needed to know the difference between fiat currencies and their crypto counterparts.
In this article, we will cover aspects such as what are conventional futures, what are cryptocurrency futures, how do their work, and what are their similarities and differences.
What are conventional futures?
Futures can be defined as the responsibility to buy or sell a specific asset at a certain price on a specific date in the future, hence, their name. The most important aspect to take in here is the fact all futures contracts are defined by the number of their underlying assets, the contract execution dates, and the agreed-upon prices. Also called the strike price, it’s the price for which buyer agrees to pay for the asset at hand, as well as the price at which the owner wants to sell it for.
Put simply; the buyer agrees to buy a certain an asset at a certain point in time at a price that needs to be in accordance with that specified by the seller in the future.
What are crypto futures?
As we’ve mentioned before, futures are financial contracts between parties and are based on the future value of an underlying asset. Also specified above, for a contract to execute, various conditions have to be met (the price of execution and the duration of the contract at hand). To extrapolate on that idea, in the case of crypto futures, cryptocurrencies are the underlying assets.
A cryptocurrency future contract can be viewed as a requirement to either sell or buy a certain number of tokens or coins (from any cryptocurrency) at a specific price before the contract expires.
What are their similarities?
One of the main similarities is the fact that both conventional futures and crypto futures have the ability to get exposed to the price of an underlying asset without the holder having to physically “own” or “hold” the asset. You can invest in the price of a Dollar without actually owning it, and it’s the same for Bitcoin, you can invest in its price without needing to actually buy and own a Bitcoin.
What’s more, both types of futures contracts use leverage. This means that you only need a small part of the capital to take on a particular position. Leverage trading is a useful tool for advanced traders as it allows them to maximize their capital efficiency by taking bigger positions or by spreading the capital across multiple positions.
Another, very important commonality between the two is related to their main role, that of reducing or managing risk and speculation. For example, both crypto and a traditional future can help you protect the value of a position you are currently at. They can just as easily help actualize the sentiment towards any market move, be it an increase or a decrease in price.
How are they different?
One of the most important differences between a crypto future and a conventional future is represented by the collateral that is required. Almost all traditional futures require fiat or any generally accepted financial asset. Of course, crypto is not accepted. It’s almost the same in the case of crypto futures, with a small difference. Many crypto exchanges do not accept fiat for collateral. The main reason for this is that maintaining a balance between the volatile crypto market and the fiat collateral can prove extremely difficult.
Speaking of the volatility of the crypto market, this is one of the underlying causes why dealing with crypto futures is such a challenging task. A thing to keep in mind is the fact that cryptocurrencies are still a very new concept (at least when compared to fiat currencies), hence the historical price data range is short. As expected, this makes pricing patterns very challenging to identify.
Since crypto futures are also younger than their traditional counterparts, you, as an investor will be inevitably provided with far less knowledge. This might make your trading strategies more shallow than when compared to traditional futures.
The only thing to remember here is that patience is key. If you want to learn to trade crypto futures, then you will have to research a lot, to trust your instincts, and to learn from your mistakes. Trade safely!
