With Kraken announcing that it is now offering futures trading for cryptocurrency there are new opportunities for investors. Many people want to know about the advantages of trading cryptocurrency futures. This type of trading can offer some benefits that spot trading does not. It has been widely used with many types of financial instruments over the years, and now it is possible with Bitcoin and other cryptocurrencies.
A Brief Explanation of Futures Trading
Before we take a look at the ways in which futures trading can be beneficial, let’s offer a brief explanation of what futures trading is for those who may be unfamiliar. Futures essentially represent an agreement that you have to buy or sell a financial instrument such as a stock or a crypto token at a later date.
Futures are often used by traders when markets are very volatile. They can be used to hedge risk and lock in profit. Like all other investments, futures involve risk. This risk can sometimes be higher than it is with other types of investing. The primary factor that fuels futures trading is speculation. The investor is speculating on how the market will move within a given period of time.
Now, let’s explore some of the advantages that are associated with futures trading.
Crypto Futures are Leverged
If you have any type of investment experience you will understand the concept of leverage. With leveraged investing the trader is only required to put in a small amount of the total contract value. This is called a margin. Leveraged trading of crypto futures allows the investor to control a greater amount of the asset without being exposed to greater financial risk.
For a typical futures contract the investor might be asked to place a margin of 10% of the total contract value. Let’s sat that the cost of the futures contract is $1,000. The investor can use $100 in margin to trade aThe Advantages Of Trading futures contract. The margin is a security that is there in case the market moves in an opposite direction from what the investor has speculated. If the market moves more in the opposite direction the investor may be required to pay an additional fee. This brings the trading account to a maintenance level.
Leveraged trading has the potential to allow investors to earn greater profits than they would from spot trading or purchasing digital tokens at market value. This is because more of the asset can be controlled with a smaller investment.
The Liquidity of Crypto Futures
Another advantage of trading crypto futures is that they are a very liquid investment. The reason for this is the volume of futures trades that are made each day. The volume of trade helps to guarantee that market orders are filled as soon as they are placed.
A more liquid market is also beneficial in the sense that it helps to stabilize prices. This is especially true as the futures contract begins to near its maturity. An investor who has a very large position in crypto futures is able to clear out that position without having a negative effect on the entire market.
Crypto Futures Offer Low Commissions
Exchanges make their money on commissions for trades. Investors are typically charged a commission on each order that they wish to execute. This fee is charged when the investor closes out their investment position. It can vary from exchange to exchange. On average the commission is about 5% of the total contract value.
Some online brokers for stocks where the investor is in complete control of their portfolio may charge as little as $5 per trade. A full service broker can charge $50 or more. With crypto futures trading, the fee will be somewhat nominal when compared to other forms of investing.
Crypto Futures Can Produce Fast Profits
There are plenty of traders who do not have the patience to adopt a buy and hold investment strategy. Some of them want to realize a profit quickly, exit the market, and take their money. Futures trading may be a good choice for short term traders because it has the potential to deliver fast profits.
The speculator in futures is using leverage to control more of an asset and therefore has greater market exposure. When the market moves in the direction that the speculator has chosen the profits will be greater than they would have if the investor was spot trading. However, with more market exposure comes more risk. Crypto futures investors can also lose money faster than those who spot trade.
Hedging Risk is Possible With Crypto Futures
Many investors choose to use futures in an effort to hedge risk. They are most often used by companies that participate in foreign trade. This is to mitigate the risk of the foreign exchange market. It is possible to lock in a specific rate of return when using futures as investments.
Other investors feel that futures contracts provide them with a level of diversification that they need to balance out the risk of their entire investment portfolio. When one adds in the fact that it is much cheaper to invest in futures contracts when compare to spot trading, the vehicles become even more attractive as hedging vehicles.
Futures Contracts Can be More Fair
A concern that many investors have when they trade securities at spot is that insider trading is present. It is also true that brokers in some markets like FOREX use a dealing desk to actively trade against their clients. In futures there is less risk of trading on inside information because the movements of the markets are much harder to predict.
Crypto Futures are a Speculative Paper Investment
In most cases investors in future contracts are not actually taking delivery of the security. Compare this with purchasing cryptocurrency to hold. You actually own that cryptocurrency and are subject to its rise or decrease in value as the market dictates.
A speculative investment in a futures contract exists only on paper. It is, nevertheless, a real investment vehicle that has the potential for gains or for loss.
It is Legal to Short Sell a Futures Contract
Another appealing aspect of futures contracts is that short selling the securities is legal. An investor can take a short position in the hopes of securing a quick profit. Compare this with the stock market where not all stocks are allowed to be shorted. There is no such prohibition for futures investors.
Summing Up Cryptocurrency Futures
It is clear that cryptocurrency futures hold much upside for investors that want to limit risk exposure while looking to make a decent short-term return. What Kraken has done by introducing futures trading into its platform is combine spot and futures opportunities for the crypto investor. It is not necessary for the investor to maintain two separate exchange accounts if they want to participate in both types of trading.
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