Crypto Futures Trading Guide For Beginners

Trading crypto futures is unique from spot deals in many ways. First, crypto futures trades do not require you to immediately buy, sell or hold digital assets in order to participate. Instead, traders try to buy or sell a futures deal, which represents the value of a cryptocurrency at a special period in the future. It's no coincidence that most experienced investors trade futures. Futures offer low-cost, liquid and government-controlled trading in nearly all applicable stocks. The practical deals on DAX and others can also be traded by private investors. But are futures actually suitable for beginners? Yes, because the access to the futures is now also easy for private investors and secondly, more and more brokers with deals for difference and small futures on the large ones are offering a realistic option, even for smaller budgets. The necessary situation, however, is that the specifics of futures and the related risks are completely understood.

What Are Futures?

Futures by their definition, are unconditional forward transactions. The buyer of a futures deal undertakes to buy the underlying asset on the expiry date at the agreed price. The seller of a futures on the other hand, undertakes to sell the underlying asset at the agreed price on the due date. At first glance, futures trading does not differ from regular cash exchanges, apart from the agreement on futures. But there is one key difference: futures are based on an underlying asset, and their price is the futures exchange rate, which depends primarily on the spot rate. A look at the price category of a business newspaper reveals that the price of the DAX futures is always slightly above the spot price of the market. There is an easy reason for this: If an investor buys the DAX on the spot exchange, he has to pay the entire purchase price immediately. If, on the other hand, he opens a long place in the DAX future, he only has to withdraw a fraction of the current exchange value as security on the crypto futures.

The difference between this security withdrawal and the complete market price can be invested at a safe interest rate. The income to be achieved with this safe interest rate corresponds to the market rate difference between the spot rate and the forward rate. While this constellation is the rule for crypto futures, other constellations sometimes arise for futures deals on. For example, due to an acute increase in demand, the current price may be higher than the future price.

Why Are Futures Leveraged Tools?

When asked, the statement often comes up that they are leveraged tools. We already know this term from other investment conditions, such as CFDs. But why are the futures also a leverage tool? Those who invest in futures only need a small part of the actual value and can still invest. The intensity of the leverage depends on the exchange.

Trading futures also offer some advantages to individual investors. Firstly, almost no other tool makes it so easy to speculate on falling prices. All you have to do is open a short spot in futures trading, while short selling in shares is relatively difficult. Futures offer much simpler pricing than offers, where the remaining term sometimes influences the opportunity price more than the actual price development of the underlying asset. Of course, contracts for difference also allow speculation on falling prices in a very uncomplicated way. However, these items are the second choice: brokers and issuers derive them from futures or carry out hedging transactions using appropriate crypto futures.

In contrast to certificates and deals for difference, investors can be sure of regulated and strictly observed procedures when trading futures on a crypto exchange. The business method of many brokers and issuers is precisely to pass on the bid/ask spreads of the futures exchange to their own customers with an installment. A small futures broker comparison usually reveals this quite quickly: Usually, the dates of the rolling procedures in the deals match the due date of the respective futures or are very close to it.

Futures trading requires very little capital investment compared to an investment in the underlying asset. This enables trading with a leverage: Investors can move some of their assets in the market and thus achieve disproportionate returns in relation to the investment. For example, if the margin rate of the futures platform is 10%, this results in leverage of 10:1. A 1% change in the base value is then enough for a profit of 10%.

Trading Futures Is Also Interesting For Private Investors

The question “What are futures?” can now be answered as follows. In addition to securities or other tools, futures are considered interesting investment options for private traders. Trading takes place on e-futures platforms. However, investing in futures is only recommended for ambitious investors, as this topic is very complicated. Not only the selection of futures is enormous, but also the trading situations at the brokers. There are futures on currencies or bunds. Market indices can also be traded as futures. The well-known future is the DAX future, which is available from most brokers with a futures offer. In addition to the crypto futures, there are also item futures. If you want to start trading and futures, you should definitely obtain large scale data and start with a demo profile with the broker of your choice.

Collateral For Futures Leverage

You can either buy a future in the prediction of a rise in price, opening a long position or sell it in a falling price. For both transactions, however, you must withdraw sufficient security, which is calculated and determined by your bank or your futures broker. This procedure amount is blocked in your profile for each future held and serves as a buffer against potential price losses. Some brokers usually assume the lowest margins of the market exchange, while other providers also require an individual security surcharge. The amount of the margin determines the leverage that an investor can use with his wallet. In line with the price movements of the underlying asset, the margin also increases or decreases. For example, if the margin is 5%, the trader can act with very high leverage of 20 and thus move up to 20 times his investment on the stocks.

Duration-Related Holding Costs For Futures

The slight and continual distance between the underlying and the future can be easily explained. This is due to the holding costs that are incurred when the underlying asset is purchased immediately without concluding a futures transaction. Because in order to acquire an underlying asset, the buyer must either take out a loan and pay interest on it or forego interest on the money stock. All costs and income for the variant investments are taken into account when determining the price of the futures, this is referred to as the cost of carrying. The price of a futures deal can usually be slightly higher or slightly lower than the underlying asset, depending on whether the holding costs are good or bad.

Index futures are usually determined by the bad cost of carrying because the financing costs for holding a comparable wallet usually exceed its income in the way of dividends. The future will then be quoted slightly higher than the index. At the end of the term, the distance to the index decreases, because the remaining term implies lower and lower holding costs. Futures buyers are willing to pay prices for the futures that slightly outperform the index given the costs saved until maturity.

Arbitrage Opportunities

Arbitrage can also be traded with futures. Arbitrage is the exploitation of stock imbalances for danger-free profits. If there are notable deviations in the price between the underlying and the future, this can be exploited by opening a long position in the cheaper value and a short one in the more expensive value. If the underlying and the future then match up again, this results in an arbitrage profit. However, since an investor competes with the PC-aided mechanism of institutional investors, stock imbalances almost only occur in unusual situations, such as confusing crash with very fast, strong price movements. Arbitrage is, therefore, no reason for private investors or traders to deal with futures.

Discipline and Strength Is Important

Due to their easy structure and handling, futures are also suitable for trading for investors who have only traded shares and CFDs so far. However, the capital requirements, money handling, and also risk must be taken into account. Due to the risk of loss, a high degree of self-discipline, strength, and a clear plan are required in addition to knowledge of how they work. Extensive previous knowledge is not necessary, but a few years of market experience should have a notable influence on the chances of success in futures trading. From this point of view, futures trading is more suitable for advanced users and those switching from trading or for investors who want to expand their trading. Beginners with little experience should take their first steps with markets or CFDs and only switch to futures after a few cycles have been successfully completed and without financial injuries.

Even if you react quite sentimentally to losses, futures trading is most likely the wrong field for you. Experience shows that investors with weak strength often tend to exaggerate risk in the event of bad developments, for example letting losses run or the regular subsequent trading. However, anyone who can rule out such potential hazards with certainty has a good chance of becoming a sustainably profitable futures trader sooner or later. Mini futures in particular represent a good opportunity to regular methods such as ETFs for enough well-off private investors. Thanks to the lower multipliers, these have a notable lower value than the classic futures, which are particularly well known with largel investors.