Futures is a popular financial instrument used by advanced traders. Different valuable commodities can be a subject for trading – gas, precious metals, oil, etc. Futures are also popular in the cryptocurrency market with underlying assets – digital coins.
What is futures trading crypto? Suppose you did some research and estimated that the ETH price would increase, so you have the opportunity to sell your holdings and make a profit. You can conclude a futures contract and fix the future value of ETH and the date when you owe to sell ETH. If your prediction is correct and the market really moves up, increasing the ETH value, you sell your coins on the day and at a price stated in the contract. And the reverse situation: you estimate the market will drop in a while. So you can sell your holdings now (at a higher price) and re-purchase them at a lower price in the future. So you make a crypto futures contract for buying ETH and buy back assets at a low rate when the expiration date comes. That is how it works in simple terms.
Crypto Futures Leverage
Some crypto futures trading platforms offer leverage for this type of trading. Leverage is borrowed funds that allow a trader to multiply his initial amount 10, 20, 30, 100 etc. times. So you can buy an ETH futures contract worth $20000 while, in fact, using only $2000. Accordingly, the profit you make will be multiplied depending on the leverage you pick. On the other hand, if your price forecast is wrong, you bear huge losses, and your position can even be liquidated.
Some facts about crypto futures leverage:
- When picking leverage, a trader evaluates his risks. The bigger the leverage, the higher the risk.
- Funds can be borrowed from a crypto platform’s reserves, or another option is when other users lend their funds with interest.
- Some platforms offer blurry leverage conditions, so be careful when reading about the fees and terms of using futures contracts.
Every crypto platform provides different maximum leverage – ByBit offers X100, the crypto futures platform WhiteBIT – X20, FTX – X20, and Binance Futures – X25. For more information on futures and the role of leverage in it, read the WhiteBIT blog.