With all of the market uncertainty and the recent crypto crash, many investors are looking for their next move.
Should they HODL?
Should they cash out and run for the hills?
Is Crypto still a good investment, and if so, how to capitalize on it with its current bearish moves?
One option may be looking into futures or derivatives for Cryptocurrency. While you have probably heard of terms such as futures and options for commodities such as oil or sugar, did you know that you can trade futures and derivatives for Cryptocurrency?
Crypto derivatives are the secondary contracts or financial tools that derive their value from a primary underlying asset, such as Bitcoin.
Crypto derivatives typically come in two forms: futures and options.
Futures allow investors to purchase an asset at a predetermined future date for a fixed price with delivery scheduled on this date.
Options provide the right but not obligation to buy or sell assets at specified prices within specific time frames.
A Bitcoin derivative allows people to trade contracts that follow the price of Bitcoin without even having actually to own any bitcoin.
Instead, they settle the contract in USD or any previously agreed currency. What distinguishes future contracts from their derivative instruments is the specific settlement date.
If you’re looking to do any trading with Crypto futures or derivatives, there’s one thing that new traders should know before they start investing in crypto futures and derivatives:
How do I avoid losing my shirt at the hands of an uncontrollable market?
It’s not as easy as it sounds.
Crypto traders who don’t understand how these trading instruments work could find themselves in a very precarious position.
Let’s take a deeper look at what precisely a crypto futures contract is and how it differs from other cryptocurrency trading.
Crypto Futures And Derivatives, A Deeper Dive
A cryptocurrency futures contract is a future agreement between two parties to buy or sell an asset at a specified price on a specified date.
It’s sort of like a bet, but the outcome can’t be determined beforehand.
It’s also different from other types of options. For example, stock options give their holder the right to buy or sell shares of common stock at a specific price within a certain time frame.
Crypto futures contracts are similar to stock options, but they give you the right to trade cryptocurrencies instead of common stocks.
They let you figure out how much you want to invest while also having an option for when you want to exit your position.
A derivative is an asset whose value is derived from that of another asset, such as a stock or index.
A crypto futures contract lets you speculate on what will happen to the price of Bitcoin in the future. In contrast, in conventional derivative trading, investors trade securities whose value is derived from other securities’ values (e.g., bonds).
How Do Crypto Futures And Derivatives Work?
A trader can buy or sell a futures contract on a cryptocurrency without owning the underlying asset.
For example, you could buy a futures contract for Bitcoin, which would guarantee you the right to purchase 1 Bitcoin at (for instance) USD 50,000 per coin at any time in the next year.
The price of this contract will fluctuate based on the ups and downs of Bitcoin over time, but it’s guaranteed price to you based on your “future” best guess that it will be $50,000 at the end of its term.
The good news is that if Bitcoin went up to $100,000, you would have purchased it for $50,000.
The bad news is that if Bitcoin went down to $10,000, your futures contract would still be for $50,000 – a loss of $40,000.
If you currently trade with cryptocurrencies as part of your investment portfolio, crypto futures and derivatives might be an option.
But if you’re just getting started with cryptocurrencies and don’t understand how these financial instruments work or what they are, then it’s best not to dabble into them yet.
Who Would Crypto Futures And Derivatives Be Best Suited For?
These products are NOT intended for the average trader.
Anyone who has a deep understanding of trading and knowledge of Cryptocurrency could use these products to their advantage.
One must always do their own diligent research and map out a solid trading plan and risk mitigation strategy.
What Are Some Risks That Come With Trading In Crypto Futures And Derivatives?
Crypto futures and derivatives are trading products that use underlying Cryptocurrency as their value base.
The main difference between these trading products is that the trader agrees to buy a predetermined amount of an asset at a pre-set price on a specified date with a futures contract.
With a derivative, the trader will be holding or swapping an asset without actually owning it.
There are several risks associated with trading in crypto futures and derivatives. For starters, these products can be challenging to understand due to the complexity of the underlying market.
Secondly, as more people invest in these markets, volatility increases, as does the risk for all traders involved.
Finally, there is often no clear exit strategy for traders who wish to get out of these products before losing their shirts.
There are many risks to trading cryptos and a chance for you to make a profit. If you’re thinking of this type of investment, then it’s wise to educate yourself on the market and how it works first and foremost before taking any action.