What are Cryptocurrency Futures?
Cryptocurrency futures are contracts that represent the value of a particular cryptocurrency. When you enter into a futures contract, you do not own the underlying crypto asset. Instead, you own a contract agreeing to buy or sell a specific crypto asset at a later date.
What are the Differences between Crypto Asset Spot Trading and Crypto Asset Futures Trading?
1. Leverage: Leverage can be very capital efficient. Applying leverage allows you to hold a larger position with less capital when trading futures. On the other hand, leverage cannot be applied to spot trading.
2. Short-term Trading and Bearish Phases: If you hold crypto assets in the physical market, you can increase your profits by increasing the value of your crypto assets over time. Futures contracts, on the other hand, allow you to profit from short-term price movements by applying leverage. On top of that, when the price of Bitcoin falls, holding a short position will allow you to make a profit even when the price falls. Futures contracts are ideal for miners and long-term investors as they can also be used to protect against unexpected risks and extreme price volatility.
3. Liquidity: With trillions of dollars in monthly trading volume, the crypto futures market offers deep liquidity. For example, the average monthly trading volume of the Bitcoin futures market is $2 trillion, which exceeds the trading volume of the Bitcoin spot market. It's high liquidity facilitates price discovery and allows traders to trade quickly and efficiently in the market.
4. Futures and Spot Prices: Cryptocurrency prices are determined by supply and demand. The spot price is the prevailing price for all transactions in the spot market. The futures price, on the other hand, is the prevailing spot price plus the futures premium. The futures premium is the future price premium of the futures price over the spot price, which can be positive or negative. A positive premium means that the futures price is higher than the spot price, and a negative premium means that the futures price is lower than the spot price. Changes in demand and supply can cause volatility.
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