What are Cryptocurrency Futures?
Cryptocurrency futures are contracts that represent the value of a specific cryptocurrency. When trading futures contracts, you do not own the underlying cryptocurrency. Instead, you hold a contract that agrees to buy or sell a specific cryptocurrency at a later date.
Differences between cryptocurrency spot trading and futures trading:
1. Leverage: Leverage can greatly enhance capital efficiency. By applying leverage, futures trading allows you to hold larger positions with less capital. On the other hand, leverage cannot be applied in spot trading.
2. Short-term trading and downturns: Holding cryptocurrencies in the spot market allows for increasing profits as the value of cryptocurrencies rises over time. In contrast, futures contracts allow for profiting from short-term price fluctuations by applying leverage. Additionally, holding short positions in futures contracts enables profiting from price declines, even during downturns in the Bitcoin price. Futures contracts are ideal for miners and long-term investors as they can be used to protect against unexpected risks and extreme price fluctuations.
3. Liquidity: The cryptocurrency futures market, with a monthly trading volume exceeding trillions of dollars, provides deep liquidity. For example, the average monthly trading volume of the Bitcoin futures market is $2 trillion, surpassing the trading volume of the Bitcoin spot market. This high liquidity facilitates price discovery and enables traders to execute trades swiftly and efficiently.
4. Futures price and spot price: The price of cryptocurrencies is determined by supply and demand. The spot price is the predominant price of all transactions in the spot market. On the other hand, the futures price is the spot price plus the futures premium. The futures premium refers to the premium of the future price over the spot price, which can be either positive or negative. A positive premium indicates that the futures price is higher than the spot price, whereas a negative premium means that the futures price is lower than the spot price. Changes in supply and demand can cause fluctuations in the futures premium.
For information on how to get started with futures trading, click here.