Crypto futures trading: How to Trade the Futures Market

Cryptocurrency futures trading has exploded in popularity over the last few years. With the ability to use leverage and go both long and short, bitcoin futures present a unique way to profit from the extreme volatility seen in the crypto markets. However, using this trading strategy also come with substantial risks if not traded carefully. This guide will walk through the basics of trading crypto futures for beginners.

Crypto Futures in Essence

A crypto futures contract is an agreement to buy or sell a cryptocurrency at a predetermined price at a specified time in the future. For example, you could enter a futures contract to buy 1 Bitcoin at $30,000 in 1 month.

Key terms:

• Settlement Date: The date when the contract expires and you must buy/sell the asset at the agreed price.
• Expiry Date: The last date you can trade a futures contract before settlement.
• Leverage: Futures allow you to pay just a portion of the total value upfront and trade larger positions. It is often 5x, 10x or even 100x.
• Long/Short: You can go long if you think prices will rise, or short if you think they will fall.
• Perpetual Swaps: Futures that have no expiry date and allow indefinite trading.

How Does Futures Trading Work?

Here is our quick overview of how futures trading functions:

• You deposit collateral (margin) into your futures account to open a position. For example, 20% initial margin means you deposit 20% of the total position value.
• Profits or losses accrue in your account based on the futures contract price. If prices move favorably, your margin balance increases. If they move unfavourably, it decreases.
• If margin drops below the maintenance margin level (often 10-15%), you may get margin called. This requires quickly depositing more funds.
• If you fail to meet the margin call, the exchange can liquidate your position to pay back the borrowed funds.
• When the contract expires, it must be settled based on the asset’s spot price. For perpetual swaps, you can hold positions indefinitely.
• Leverage amplifies your gains and losses. Always maintain proper risk management

Why Trade The Crypto Futures Market?

There are a few key reasons traders are attracted to crypto futures:

• Leverage – Take larger positions with less capital.
• Shorting – Profit from falling crypto prices.
• Hedging – Offset risks in your crypto holdings.
• Arbitrage – Take advantage of differences between spot and futures prices.
• 24/7 markets – Crypto futures trade nearly around the clock.

In the right hands, crypto futures can be a powerful trading instrument. However, the multiple and complexity also makes them risky for beginners.

Cryptocurrency Futures Exchanges

The most popular exchanges for trading cryptocurrency futures include:

• Binance – World’s largest crypto exchange. Offers up to 50x leverage.
• Bitget – Fast growing futures exchange. Up to 125x multiple.
• Bybit – Crypto-only platform with up to 100x leverage.
• Deribit – Specialized crypto futures and options exchange.

These exchanges all offer both perpetual swap and fixed expiry futures on major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). Most also support altcoins such as Binance Coin (BNB) or Solana (SOL).

You’ll need to fund your futures trading account on the exchange, either with fiat currency or cryptocurrencies like BTC or ETH.

Key Concepts to Trade Crypto Futures

To trade futures effectively, there are some key concepts to understand:

Leverage

It allows you to open much larger positions with less capital. For example, 5x leverage means you can trade with 5 times the capital you deposit.

With higher multiple you can maximize profits – but losses are also amplified severely. Always use responsible risk management.

More on leverage here.

Long vs. Short

You can go long (buy) if you think an asset’s price will rise, or go short (sell) if you think it will fall. Shorting is a key benefit of futures over trading only cryptocurrency spot pairs.

Explore short selling strategies.

Margin

Margin is the percentage of the full value of your position that you must have deposited in your account. For example, 20% initial margin means you must have 20% of the total position size.

If margin drops due to losses, you may get margin called and positions liquidated. Trade with proper risk management.

Learn to margin trade like a pro here.

Funding Rates

The funding rate is exchanged between longs and shorts to keep futures prices aligned with spot prices. If longs are dominant, they pay shorts. When shorts are dominant, shorts pay longs.

Settlement vs. Expiry

Settlement is when the contract expires and holders must buy/sell the asset. Expiry is the last date contracts can be traded before settlement.

For perpetual swaps, there is no settlement or expiry since positions can be held indefinitely.

Crypto Futures Trading Strategies

Here are some common trading strategies used with crypto futures:

• Trend Following – Taking long positions during uptrends or short positions during downtrends. Uses indicators like moving averages to identify the trend direction.
• Range Trading – Entering long/short positions when price reaches range support and resistance levels, betting it will revert back to the mean.
• Scalping – Opening many short-term positions aiming to profit from small price movements. Relies on tight stop-losses.
• Arbitrage – Taking advantage of price discrepancies between exchanges or between spot/futures prices.
• Crypto Fundamental Analysis – Basing trades on external factors like blockchain activity, news, or planned network upgrades that may influence crypto prices over the longer term.
• Technical Analysis – Using indicators like RSI, moving averages, Bollinger Bands, etc. to identify trading opportunities.

In general, having a defined trading strategy and risk management plan is crucial before touching these markets.

Risks of Crypto Futures Trading

While crypto futures provide opportunities, they also come with substantial risks:

• Leverage risk – amplifies losses as well as gains. Margin calls and account liquidations are common. Never risk more capital than you can afford to lose.
• Volatility risk – Crypto prices can swing wildly. Sudden volatility spikes can crush positions. Use proper position sizing and stop losses.
• Gap risk – Futures can gap up or down with spot prices, triggering slippage on your entries and exits. Manage risk carefully during high volatility.
• Contango risk – Sometimes futures trade at a premium to spot prices. Being long can come with a cost over time.
• Exchange risk – Exchanges can have outages or get hacked. Keep coins in cold storage when not actively trading.
• 24/7 risk – Trade nearly around the clock. You can get margin called at any time, even while sleeping!

Getting Started with Crypto Futures

If you want to start trading crypto futures, follow these steps:

• Choose an exchange – Compare fees, leverage and coins across different platforms. Many offer demo accounts to try out first.
• Fund your account – Deposit capital with fiat or crypto. Only risk what you can afford to lose.
• Learn to analyze futures – Understand basics like contract specs, margin and funding rates. Study trading strategies.
• Start small – Get experience with small position sizes first. Don’t rush into 100x leverage with big positions as a beginner.
• Use stop losses – Set proper stop losses on every trade to limit potential losses.
• Check funding rates – Monitor funding rates regularly. Being long or short when rates are negative can cut into profits.
• Watch for liquidations – Be aware of liquidation prices. Make sure to not get over-leveraged.

Take your time and build your knowledge before starting to actively trade. With proper risk management, crypto futures can be a rewarding market to trade in.

Conclusion

Crypto futures allow traders to benefit from both bull and bear markets using leverage. However, they come with substantial risk if not understood fully.

Focus on developing a sound trading plan and apply robust risk management to all trades. Over time you can build up futures trading skills and capital to take advantage of crypto’s famous volatility.

Frequently Asked Questions

What is the benefit of trading futures vs spot trading?

The key benefits are leverage, short selling, and arbitrage opportunities between spot and futures prices.

How much money do I need to start trading crypto futures?

Exchanges allow opening positions with as little as $5-10. But it’s recommended to start with at least $500-1000 to properly manage risk.

What is the best crypto futures trading strategy for beginners?

Beginners should focus on basic trend following or range trading strategies. Advanced technical analysis can come later.

How risky are crypto futures compared to trading spot?

Futures are much riskier due to leverage that amplifies both profits and losses. Strict risk management is a must.

Should I start trading crypto futures on a demo account first?

Yes, demo trading can help you gain experience without risking real capital. Try out strategies in a demo account before using real money.