As the world of cryptos continues to evolve, new financial instruments like crypto futures have emerged, offering investors new avenues for participation.

Crypto futures are contracts that enable traders to speculate on the future price movements of cryptos without owning the underlying assets. This guide dives into crypto futures and how they operate on regulated and unregulated exchanges.

What are Crypto Futures

Crypto futures are the financial contracts that obligate the buyer to purchase, or the seller to sell, a specific crypto at a predetermined price and date in the future.

They provide a way for investors to speculate on the future price of a crypto, like Bitcoin or Ethereum, without necessarily owning the asset itself.

They are similar to futures contracts for commodities like oil or gold or financial instruments like bonds. However, instead of these traditional assets, the underlying asset in a crypto future is a digital currency.

Understanding Crypto Futures in Detail

A crypto futures contract has three core elements.

The "settlement date" is the deadline when the contract needs to be honored; one party buys while the other sells at the agreed-upon price. Traders have the flexibility to transfer their contracts to others before this date.

Next, "contract size" details the worth of the underlying asset per contract, which can vary among trading platforms.

One of the defining features of futures contracts is leverage. This means the investor can enter into a contract worth much more than their initial investment.

For instance, with leverage of 10:1, an investor could enter into a futures contract worth $10,000 by only putting down $1,000 upfront. This leverage can amplify gains if the market moves in the investor's favor but can equally amplify losses if it moves against them.

For instance, Let's consider Bitcoin, currently priced at $10,000. Using a 10:1 leverage, you can enter a futures contract to buy Bitcoin in a month, costing only $1,000 upfront.

If Bitcoin rises to $11,000, you can buy at your contract price of $10,000 and sell immediately for $11,000, making a $1,000 profit on your $1,000 investment.

However, if Bitcoin drops to $9,000, you're still obliged to buy at $10,000, resulting in a $1,000 loss, wiping out your initial investment. This is how leverage can amplify both gains and losses.

How Do Crypto Futures Work on Regulated Exchanges

Regulated exchanges, such as CoinDCX, offer a safer environment for trading crypto futures as financial regulatory authorities oversee them. This oversight provides security and transparency that can appeal to institutional investors.

After the account is approved and funded, investors can buy and sell futures contracts based on the price and date parameters set out in the contract. They can hold onto the contracts until expiration or sell them to another investor before they mature.

Suppose an investor purchases two Ethereum futures contracts, each valued at $3,000, totaling $6,000. The investor must deposit a margin of 50% ($3,000) and could apply leverage to cover the rest of the purchase.

At the contract's expiration, investors can either extend it by rolling it over to new ones or allow it to expire and receive the cash settlement. The cash settlement amount will be determined based on Ethereum’s price at contract expiration.

How Do Crypto Futures Work on Unregulated Exchanges

In unregulated exchanges, crypto futures work somewhat differently than they do on regulated ones. These exchanges offer considerable risk-taking opportunities, potentially leading to high profits and significant losses.

For instance, many unregulated exchanges offer leverage of up to 120 times the trading amount. In unregulated exchanges, trading limits are determined by the margin available. Margin is essentially collateral – the minimum funds you must hold in your account to execute trades.

The larger your trade, the more margin is required by the exchange. Given the inherent volatility and risk of cryptos like Bitcoin, the margin requirements for trading their futures are typically higher than those for traditional commodities and assets.

Also Read: What are crypto options

Where Can You Trade Crypto Futures?

Crypto futures can be traded on various platforms, known as crypto exchanges. Here are some of the notable ones:

CoinDCX

CoinDCX is a leading crypto exchange in India. It offers futures trading with up to 20x leverage on various cryptos, including Bitcoin and Ethereum. Its user-friendly interface and comprehensive educational resources make it a popular choice for beginners and seasoned traders in the Indian market.

Binance

As one of the largest global crypto exchanges by trading volume, Binance offers futures trading for many cryptos, including Bitcoin, Ethereum, and others. It provides high-leverage options and advanced trading features, making it popular among experienced traders.

Kraken

This US-based exchange offers futures trading on Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash, among other cryptos. Kraken is known for its strong security measures and transparent fee structure, making it a trusted platform for many traders.

BitMEX

BitMEX is another major player in the crypto futures market. It offers up to 100x leverage on Bitcoin futures and futures contracts for other popular cryptos. BitMEX may be unavailable in certain jurisdictions due to local regulations.

Advantages of Trading Crypto Futures

Crypto futures have the following advantages:

Regulatory Oversight

Trading crypto futures offers the advantage of regulated exposure to cryptos. E.g., CoinDCX is registered as a reporting entity with FIU India. This gives institutional investors a sense of security and confidence, knowing they have a potential means of recourse.

Operational Simplicity

Crypto futures bring a high degree of simplicity. Investors can avoid the complexities of setting up crypto wallets or investing in advanced custody solutions. The focus on contracts rather than physical assets simplifies the process significantly.

Safety Measures

Unlike direct crypto ownership, futures contracts have built-in safety measures. Position and price limits enable investors to cap their risk exposure, providing control over potential losses.

Customizable Limits

Exchanges like Binance allow traders to manually adjust position and price limits based on their trading history and margin amounts. This customizable feature allows for a tailored trading experience, making it a secure, user-centric choice for participating in the world of cryptos.

Limitations & Disadvantages of Trading Crypto Futures

While crypto futures trading can be profitable, there are limitations and disadvantages. Some of the main ones include:

• The Complexity of Contracts: Understanding futures contracts requires financial knowledge and trading experience.
• High Volatility: The inherent volatility of crypto markets can lead to substantial losses if the market doesn’t move in the direction you anticipated.
• Use of Leverage: While leverage can enhance profits, it can also magnify losses. A small price movement in the wrong direction can wipe out your entire investment.
• Regulatory Risk: Crypto futures trading platforms may not be regulated, posing potential legal and financial risks to traders.

Things to Consider Before Trading Crypto Futures

Venturing into crypto futures trading requires careful thought and preparation. Here are key considerations:

• Crypto Market Understanding: Grasp the dynamics of the crypto market, acknowledging its volatility and unpredictability. Knowing trends, patterns, and market indicators can help you make informed trading decisions.
• Risk Tolerance Assessment: Evaluate your financial resilience. Only trade with money you can afford to lose, given the risk of substantial losses in volatile markets.
• Regulatory Framework Familiarity: Be aware of your region's regulatory guidelines and ensure that your chosen trading platform complies with these regulations.
• Platform Security: Prioritize using a secure and reputable trading platform. Look for platforms with strong security measures to safeguard your assets and personal information.

Also Read: Top crypto trading strategies

Conclusion

Crypto futures are financial contracts that allow investors to speculate on cryptos' future prices without directly owning the assets.

They offer advantages such as regulated exposure to cryptos, operational simplicity, built-in safety measures, and customizable limits on regulated exchanges.

However, limitations and risks include the complexity of contracts, high volatility, leverage magnifying losses, and potential regulatory risks on unregulated exchanges.

Before trading crypto futures, it is crucial to understand the crypto market, assess risk tolerance, be familiar with regulatory frameworks, and choose a secure trading platform.

FAQs

What’s the difference between crypto futures contracts and perpetual swap contracts?

Crypto futures contracts have a set expiry date, whereas perpetual swap contracts do not. This means that futures contracts will close on a predetermined date, while perpetual swaps can remain open indefinitely if you maintain sufficient margin in your account.

Where can I trade Bitcoin futures?

Bitcoin futures can be traded on platforms like Binance, CoinDCX, Kraken, BitMEX, etc. Ensure that the platform you choose is secure, reliable, and operates within the regulatory framework of your region.

Where can I trade Ethereum futures?

Ethereum futures can also be traded on platforms like Binance, CoinDCX, Kraken, BitMEX, etc. As with Bitcoin futures, ensure the platform is secure and complies with local regulations.

Is crypto futures trading risky?

Yes, crypto futures trading is risky. The market's high volatility and leverage can lead to significant losses. Traders should only invest money they can afford to lose and thoroughly understand the mechanics of futures contracts before engaging in this trading.