As the world is going gaga about cryptocurrencies, there is still a niche crowd that is visibly underwhelmed. And why not?
Cryptocurrencies, though highly valuable and promising, are also extremely volatile and difficult to comprehend. For a beginner, buying a cryptocurrency and implementing transactions using it is no easy feat.
So, people who are looking for a way to get in on the cryptocurrency buzz, without having to hold any cryptocurrency, can choose crypto futures for trading. Now, the whole concept of crypto futures is a bit confusing, so you can understandably feel hesitant to take a step forward.
But there is much to win if you are willing to take the risk. In 2020, the crypto futures market boomed, as the annual market volume exceeded $12314 billions.
Let us look at how crypto futures function, and then move on to know more interesting facts about them.
How Crypto Futures Work
Just like the traditional future trading strategies, crypto future trading has a lot to do with speculations. For the uninitiated, futures trading refers to investments that can be made without possessing any underlying assets. In crypto futures trading, you basically bet on the future prices of cryptocurrencies.
Since you do not hold any actual cryptocurrency, it is a much safer way to buy into the cryptocurrency without undertaking any major risks. Because of the same reason, futures are also much more fluid and easier to start trading with.
To be honest, crypto futures trading is a relatively new concept, as it was introduced not long ago in 2017. It all started when futures contracts for the most popular cryptocurrency — Bitcoin, was launched by CME Group and CBOE. Despite being extremely volatile commodities, traders prefer crypto futures for the ability to experiment with flexible trading strategies, lucrative profits, and convenience.
With the increasing risk appetite among crypto enthusiasts and the growing popularity of cryptocurrencies, Crypto Futures are here to stay and rule. Now that you know all about how crypto futures work, here are a few facts that you should keep in mind:
#1 A Balanced Portfolio is Important
If you have ever put time into building an investment portfolio, chances are that you have heard about “diversifying risks”. Creating a portfolio with crypto investments is no different. As you know, cryptocurrencies bring a lot of risk to the table, and putting all your money in one place can be quite risky.
So while investing in Bitcoin futures is always a good idea, consider placing bets on other cryptocurrencies, such as Ethereum. If you have a larger risk appetite, you can also buy other cryptocurrencies that you believe in so that you can profit from market movements.
For example, if you are an investor in the UK, you can not only invest in bitcoin futures, you can also play the smart game and buy bitcoin from UK websites that offer both kinds of services.
Regardless of the futures and commodities that you choose to invest your funds into, it is important to create a balanced portfolio. Basically, this would mean distributing your risks across multiple investments so that even if one of them takes a hit, the other investments help you stay afloat.
#2 Future Contracts Cannot Be Hacked or Stolen
One of the biggest advantages that crypto futures contracts have over directly investing in cryptocurrencies is that the maintenance is so much easier. Not just that, the fact that you don’t hold any underlying assets means your contracts are safe and sound.
Sure, it sounds believable because digital assets have always been portrayed as largely unsafe and more likely to be hacked or stolen. But crypto futures contracts do not store any valuable assets — they are simply a record stating your transaction details.
It also helps that the trading happens only on a few highly touted exchanges, and futures contracts are regulated. So, if you are planning to opt for a long option with your crypto futures, you may be in for great returns.
#3 Not All Cryptocurrencies Offer Futures
As we discussed before, the concept of crypto futures is still relatively new. So while there are hundreds of cryptocurrencies that are now available in the market, few offer the option of futures contracts.
Futures are derivatives that are volatile in nature, and few reputed exchanges support you in trading them. The most popular cryptocurrencies in the world — Bitcoin and Ethereum — offer futures contracts you can invest in. Other than that, there are platforms like Kraken that offer futures contracts for other cryptocurrencies, such as Ripple, and Litecoin.
Note that every cryptocurrency exchange has its own set of rules when it comes to futures contracts.
#4 Crypto Futures Allow Hedging
If you have experience in trading traditional derivatives, you probably are already familiar with the concept of hedging. For the uninitiated, hedging is a common risk management strategy wherein traders open a short position to offset any losses that may arise from their current investment.
One of the many advantages that crypto futures offer is that it allows traders and investors to hedge their positions. This means that you can minimize the risk of losing funds if you opt for a long position and the market movements do not support your position.
Say, you have invested in Bitcoin futures with a long position. You have been monitoring the price movements and feel that bitcoin prices may fall in the next few days. Here, you can utilize hedging, and have another futures contract with a short position, thus betting against the market. So when the price does fall, you would be able to effectively offset the losses that you may incur through your first futures contract.
Considering the highly volatile nature of Bitcoin and other cryptocurrencies, hedging can be an effective strategy to minimize the risk of losing funds. Remember, you can also create futures contracts for other cryptocurrencies for hedging purposes.
#5 Many Exchanges Offer Cash Settlements
Many hesitate to invest in or buy bitcoin because of their lack of physical presence. A digital asset like Bitcoin may be highly valuable, however, you would not just be able to use it easily without going through an arduous process on a cryptocurrency exchange.
The introduction of Bitcoin futures could effectively eliminate this challenge significantly. Many exchanges started offering cash settlements for futures contract holders. This essentially meant that upon the settlement of the contract, traders had the option to choose a cash settlement instead of getting bitcoin deposited in their accounts.
While the Chicago Mercantile Exchange (CME) was the first platform to offer this option to traders, today many other exchanges do the same. This makes crypto futures contracts a highly lucrative investment, even for those who do not want to hold any actual cryptocurrency.
The evolving field of cryptocurrencies has the potential to generate huge profits and equally painful losses for budding investors. In this volatile financial market, crypto futures are a boon for traders who do not want to possess the actual cryptocurrency and still enjoy a piece of the pie. Equipping yourself with the right facts and information about this derivative is a great way to ensure that you can multiply your money and profit from your crypto investments.
Author Bio – Harsh Agrawal is the Founder of CoinSutra, an online resource helping everyone to learn about decentralized finance and get started with it. Harsh is an international speaker and author who loves blockchain and the crypto world. Harsh is featured on Forbes, Microsoft, IBM, INC, and many well-renowned publications. Connect with Harsh Agrawal on Twitter at @denharsh.