Crypto Futures Trading Guide 2022 – Everything You Need To Know

Crypto Futures Trading Guide 2022 – Everything You Need To Know

Futures are one type of derivative trading product. These legitimate trade contracts involve an agreement between two parties to buy or sell a base asset at a certain price on a specified date. Bitcoin itself would serve as the underlying asset for Bitcoin futures contracts.

Traders can hedge their bets against volatile markets and lock in future prices for a single cryptocurrency by using futures contracts. A trader can lose money if they buy bitcoin for more than it’s worth or sell it for less than they got it for if the price fluctuates unexpectedly.

Futures contracts provide an indirect route for traders to gain exposure to bitcoin and potentially profit from price fluctuations without having to buy or sell BTC themselves, which necessitates setting up a cryptocurrency wallet and navigating complex exchanges.

Regulation of Bitcoin futures trading began in late 2017 on the Chicago Board Options Exchange, now known as the CBOE Options Exchange. CBOE’s item has been discontinued, while CME’s futures have since captured a sizable portion of the cryptocurrency trading industry. On February 16 the value of all futures markets on the major foreign and domestic exchanges had rolled to $26.9 billion over the previous 24 hours. Speculators’ total exposure is represented by the notional value, which is calculated by multiplying the price of a single bitcoin by the number of futures contracts they have purchased.

On average, 10,105 BTC futures contracts were traded in 2021, up 13% from the previous year, as reported by CME.

What Sets Crypto Futures Trading Apart?

Learn The Futures Market For Cryptocurrencies And How To Invest In Them.

There are three main components of a bitcoin futures contract.

An “expiration date” refers to the last day on which a futures contract can be settled. That is, at the agreed upon price, one side must buy, while the other must sell. Traders may sell or otherwise assign their contracts to other investors prior to the closing date.

Different exchanges use different units of measurement to determine the value of the underlying asset in each contract. For example, the value of one Bitcoin futures contract on the CME is five Bitcoins. However, the value of one Deribit bitcoin futures contract is equal to $10 USD.

Trading on futures markets with larger positions is made feasible by the use of leverage, the practice whereby participants borrow funds from the exchange in order to increase their trading size. Again, leverage rates are quite variable across implementations. Kraken users can raise their transactions by as much as 50x, whereas FTX users are limited to a maximum of 20x leverage.

Additionally, futures contracts can be settled in one of two ways.

Bitcoins are shipped to the buyer’s physical address following payment.

In cash-settled transactions, buyers and sellers fulfill their obligations by exchanging cash, usually U.S. dollars.

Futures Contract Pricing Using Cryptocurrencies

It is possible that the value of a cryptocurrency futures contract will fluctuate as the contract nears maturity, even though its value is designed to closely track the cost of the underlying financial asset. Sudden, large swings in volatility are usually to blame for this, and they can be set off by anything as simple as Tesla buying more bitcoin or as significant as a major country banning cryptocurrencies. When there are supply and demand issues with a particular futures contract, the spread between the bid and ask price may widen or narrow for that product.

“Gaps” are another term for price differences. These are periods of time during which no transaction occurs and, as a result, no pricing data is available. These exchanges can only operate during their allotted trading hours on more traditional platforms like CME, even if the bitcoin market as a whole operates 24/7.

If the value of a cryptocurrency suddenly jumps during the closing hours of a conventional market, the price chart of an instrument on that platform the next day may show a large gap.

What Exchanges Deal In Futures Of Bitcoin And Other Cryptocurrencies?

Since the introduction of cryptocurrency-based futures instruments, their popularity has skyrocketed over the past five years, resulting in a plethora of traditional and cryptocurrency-native platforms where you can begin trading cryptocurrency futures.

Some of the best venues to engage in such trades are listed below.

  • FTX
  • eToro
  • CME
  • Ameritrade DTC
  • BitMEX
  • KrakenBakkt
  • Deribit
  • Bybit

In comparison to futures contracts, what sets perpetual swap agreements apart?

You may be familiar with the term “perpetual swap contract” if you’ve spent any time at all in the bitcoin industry.

Permanent swaps (or “perps”) allow investors to buy or sell an asset at a future date without expiration, much like futures contracts.

As such, a trader is free to maintain an open buy or sell contract for as long as they wish, provided they maintain their margin payments, or until they are ready to settle the contract or transfer it to another user.

Due to the lack of a set expiration date, a novel approach is required to ensure that the contract price is reasonably reflective of the market price. Traders who are long (buying) or short (selling) in this system pay a periodic fee to the opposite side, referred to as a “perpetual swap financing rate,” depending on whether the contract price is below or above the market price.

If the market price drops below the perp futures price, long traders will be required to pay a commission to short traders. If the market price is higher than the perpetual futures price, short sellers will pay a premium to long sellers to offset the difference.

Perpetual financing rates often serve as a useful gauge of the market’s sentiment toward a certain asset.

Consequences of Futures Trading in Cryptocurrencies

Futures trading has a number of substantial dangers that novice investors should be aware of, despite the fact that it has a number of advantages over spot trading, such as repeated exposures and the possibility to trade with leverage to maximize possible gains. The market is dominated by margin calls and liquidations.

Leverage, as previously established, enables traders to increase the size of their deals by borrowing money from a third party, often the exchange on which they are dealing.

Obviously, if you want to borrow money from an exchange, you’ll need to give insurance in case the trade goes against you. This safety net is the “initial margin” a trader must deposit before entering a leveraged transaction. Gains and losses are both magnified when using leverage.

However, there are three aspects of a futures contract that must be understood first.

The first margin is kept in a special account known as a margin account.

When a user’s margin account balance falls below a certain threshold, the exchange will send a “margin call” alerting the user to the situation.

If a customer’s initial margin is depleted, they must keep additional funds available in their margin account at all times. Put it in a separate account for emergencies.

When the market goes against an investor and their margin account is depleted, their position will be automatically closed, and their initial margin will be removed.

Simply dividing your leverage by 100 will give you an idea of how much the market can shift against you before you are forced to sell. If your leverage is 1:50, for example, and the market moves against you by 2% (100 minus 50), you could quickly and easily be forced to sell. In other words, the cryptocurrency market is extremely volatile, and you should be aware of the significant risk of having your assets liquidated and suffering a complete financial loss.

Traders might boost their initial margins to hold on to their positions for a longer length of time in the hopes that the market would turn around, but doing so exposes them to more financial risk.

Asset Used as Basis

The term “underlying financial instruments” refers to the underlying financial assets that underpin the price of a derivative. Thus, the price of the derivative is based on the underlying’s value. Any changes in the value of the underlying will be reflected in the related derivative’s price.

Commonly, the price of something is referred to as its “current market price” (CMP). Market participants frequently use the phrases “spot price” and “CMP” interchangeably. Both terms describe essentially the same phenomenon.

The underlying price, market price, or actual value plays a significant role in establishing the price of a derivative. The final price at which a securities was traded is known as its closing market price (or CMP). It often coincides with the true worth or current market price of the underlying asset.

Definition of a Typical Underlying Asset

Let’s look at a concrete illustration to clarify the nature of a stock market underlying financial instrument. The underlying asset of the derivative is the futures contract for shares of stock in Reliance Industries Ltd., a company whose stock is listed and traded on the exchange.

Futures on RIL shares have been developed. The underlying assets are shares in RIL. If RIL shares are currently trading at $2,600 and RIL futures were trading at $2,605, the difference in price between the two is known as “basis.”

The basis is the same amount regardless of whether the underlying security is traded in the spot or futures market.

The spread, or basis, between the underlying security price and the derivative price could be positive, negative, or neutral. Generally speaking, a positive spread exists between spot and futures prices. As the end of the contract nears, this difference often narrows. At the time of expiration, the future cost will be equal to the current market value of the underlying asset.

Diverse Forms of Underlying Assets

Below, I’ve listed the assets in question as well as the risks associated with them.

Securities often known as stocks are a kind of share ownership. The risk, balance sheet risk, and economic risk worries are relevant to stock prices because of the impact of fundamentals and market dynamics like supply and demand.

The India VIX, Nifty50, Bank Nifty, and Nifty Midcap50 are all examples of indices. They are susceptible to market volatility and general economic uncertainty. The factors of supply and demand also affect their prices.

The term “currency” is used to describe several forms of legal tender that are recognized internationally. These are susceptible to interest rate risk, political instability, and defaults on government debt. Money pairs that use these symbols include the US Dollar (USD), the Euro (EUR), the British Pound (GBP), and others.

Bonds are a type of debt instrument that can be used to make loans. They are vulnerable to debt collectors, high interest rates, and perhaps bankruptcy.

Commodities might be either perishable, like fresh fruit, or non-perishable, like nuts and seeds, or even precious metals, like gold, silver, etc. Given that supply and demand determine commodity prices, commodities are also susceptible to market risk and macroeconomic uncertainty.

Successfully Investing in Futures Contracts

Futures are commonly used to hedge against price risk in commodities or to profit on price movements rather than actually purchasing or selling the physical commodity. Futures contracts can be purchased on four different underlying assets: stocks, indices, currencies, and commodities.

The two basic types of participants in futures trading are hedgers and speculators. Hedgers utilize futures contracts to hedge against the risk of loss due to sudden or illogical fluctuations in the underlying financial commodity’s future price. Individuals and businesses who hedge often deal in cash as an underlying commodity.

Think of a large-scale facility that cans maize as an example of a food machine. if the price of corn goes up. He’ll have to pay more to the maize dealer or farmer. The manufacturer can “hedge” against a rise in corn prices by purchasing corn futures contracts equivalent to the amount of maize he expects to buy. Given the relationship between cash and futures prices, a profitable futures position can be anticipated if corn prices increase by more than the cash corn losses.

Speculators make up the second-largest group of people who trade futures. These include both institutional and individual traders on the floor. Floor traders, often known as “locals,” are self-employed individuals who conduct business on the floor for their own accounts. Floor brokers execute trades on behalf of their clients and the brokerages they work for.

How Does Futures Trading Differ From Other Types of Financial Trading?

To begin, the value of a future is derived from that of another derivative, therefore it has no inherent worth. The contract is time-limited and will not continue to accrue value forever like other forms of financial capital.

Stocks represent capital in a company and can be held for a long time whereas futures contracts have a set time period. That’s why it’s so important to factor in the market’s direction and timing when considering futures trading. One such key difference is the use of leverage in futures trading versus the trading of other financial assets.

Applying Leverage When Trading Futures

As a result, we know that a futures contract is a derivative investment. To initiate such a contract, an investor needs to contribute only a fraction of the total contract cost. All of the money owed on the contract must be paid up front before work can begin. The value and margin for maintenance are set by the exchanges. This is one of the main features that distinguishes the futures market from other financial instruments.

Initiating Yourself Into Online Commodity Trading

One definition of a commodity is a tradable good whose price is determined mostly by market forces of supply and demand. Materials include food, fuel, and metals, the most well-known of which is gold.

Investors and speculators in a regulated commodity market speculate on whether or not price increases or decreases will occur by a given date. The outdated method of calling a commodities brokerage and waiting for a fulfilled order price can be avoided by trading commodities online with some before significant research and planning.

Locating a reliable commodity broker is the initial step. Numerous brokers provide trading services, and they all offer competitive prices and dependable services.

The next thing to do is to finish up the online forms for the trading account. The broker will determine if the customer is a good fit for commodity trading. Customers’ credit, income, and wealth are all evaluated.

The account holder decides how much money to deposit into the account. Many commodities brokers provide practice tools so that customers can get comfortable with the market before committing real cash.

Trading in futures is difficult because of the great number of derivatives and the high leverage that might result in a catastrophic loss in a single trade. Therefore, knowing the function of these core parts is essential.


Futures trading is an agreement between a seller and a buyer for the future fulfillment of a certain condition. There are hedging parties and speculation parties involved. Hedge funds protect their investments from potential losses, whereas floor traders engage in speculative activity. Due to their lack of intrinsic value, futures trading are valued relative to other underlying financial products. It’s important to have leverage, for example.

The initial cost to the buyer to initiate the contract is minimal. With careful preparation, online commodity trading is possible. It’s vital to find a trustworthy broker.

Orizu Augustine
Orizu Augustine is an experienced crypto writer working for Alltechcraft. Having passion for writing, he covers news articles from blockchain to cryptocurrency and iPhone and Samsung related articles.