If you are undecided between Bitcoin futures or spot transactions, we hope this article will help you decide.
If you are undecided between Bitcoin futures or spot transactions, we hope this article will help you decide. But will the retail investor profit from it?
So far, Binance, FTX, Bybit, and Kraken have been just a few of the exchanges that have offered to trade Bitcoin futures contracts.. And the number is growing. Volume appears to have increased across the board.. And it seems that retail traders are also now more willing to profit with complex instruments.
There are many benefits to using Bitcoin futures trading.. Traders using this route can take precautions and feel more comfortable during the high volatility period.. Futures contracts can be used to reduce risk and leverage leverage when appropriate strategies are developed.
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Professional traders need to better position themselves on both sides of the market. frequently uses futures contracts for. In this article, we will focus on the basic mechanism of the instrument, its hidden costs, and the trading strategies professional traders regularly use to make a profit.
What do futures contracts mean?
Simply, an agreement to buy or sell an asset at a predetermined price at a later date. Also known as derivative instrument. Because its value is based on a specific asset.
Bitcoin futures contracts were originally associated with tangible assets such as gold and oil.. These instruments allowed producers (miners) to better manage financial risks by creating the possibility of locking prices in advance.
On the other hand, an airline could take action for the cost of fuel, which is a win-win for both parties.
The buyer, known as a long, hopes for the price of the underlying asset to rise. The seller of the futures contract, on the other hand, is called short and bets on the price retracement to make a profit.
Another appeal of futures contracts is that they allow to downgrade shares without holding stablecoins or fiat deposits on exchanges.. A buyer can increase his position during bank holidays or when cash is scarce.
Crypto miners also take advantage of this instrument to protect their future income and reduce cash flow uncertainties.. There are countless examples of professionals trading futures deals.. Even retail traders can benefit from it.
Bitcoin futures or spot, or margin trading?
Every futures trade needs a buyer and seller of the same scale and maturity. It is unlikely that they are different from each other. This type of fixed balance distinguishes it from margin trading, where traders borrow the asset for leveraged trading.. In the futures market, both parties store some margin, initially no one gets anything from it.
It should be added that futures trading does not take place in the same order book as in spot trading.. Its price may and may differ from spot exchanges. Even if it trades on Binance Futures, the futures price will fluctuate compared to the spot prices in the normal market of the stock market.
When choosing Bitcoin futures or spot market, the following should also be taken into account: The reason for the fluctuation and pricing between these two markets is as stated earlier. It is the immediate execution of the order when a sale is made in the spot market, such as. By choosing to sell future contracts, the seller delays this order and may sometimes demand more or less, depending on market conditions.. Margin calculations do not take into account the trade price of a deal to avoid market manipulations. Derivative exchanges create indexes that calculate the average price of spot exchanges, known as the “fair price”.
In doing so, exchanges offering futures contracts reduce incentives for anyone attempting to manipulate the price.. The basis for the fair price of the asset is used to determine whether a position is using too much margin and should therefore be forced closed.
Understanding the basic mechanism of futures contracts
Contracting a short futures contract without any interaction is seamless. It is possible to sell the same way and get the same amount later.. The trick here is the margin for the trade that both parties invest to make the trade happen.
When the market goes up, the margin moves from the seller (short) to the buyer (long). This happens through an automated transaction that is calculated every second based on the fair price.
Let’s consider a scenario where someone deposits 100 USDT on Binance Futures.. Let this trader be willing to buy 1,000 USDT worth of Bitcoin futures using 10x leverage.
This type of buyer cannot withdraw futures contracts and transfer them to the Binance regular exchange.. Because Bitcoin futures contracts are not the same as a real BTC. As shown in the futures example above, an order of 0.114 BTC – worth $1,000 – would cost the investor $49.87. This cost relates to the initial margin required to hold this type of position.. If the supporting Bitcoin price (the fair price) starts to drop, a larger margin is required.
Both sides of the trade need to make a margin deposit. There is an implicit cost to perform these perpetual contracts. The majority of crypto futures traded never expire. So in theory an investor would never need to close a position.
Bitcoin futures or spot trading – what advantages do they have?
Even if a buyer has $1,000 to spend, he can use his own money for other short-term trades. For example, $200 can be assigned to margin trading for a 0.114 BTC position, while the remaining $800 can buy leveraged positions on altcoins.
Some traders are uneasy about depositing large sums on exchanges.. Leveraged trading reduces exposure to the market by giving one the ability to sell the spot market position in smaller slices.
Degenerate gamblers can also make profits by making small deposits every day or week.. This strategy brings in returns as good as $50 but puts a hard cap on your losses.