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Bitcoin futures trading lets you go long on Bitcoin if you want to bet on a price rise, or go short on Bitcoin if you want to bet on a price drop.
When you buy Bitcoin futures, what you’re actually purchasing is an agreement to receive a certain amount of Bitcoin, or the equivalent amount of money, at a specified time.
With this mechanism, you can profit from correctly betting that the price of Bitcoin will go up, which is called going long, or profit from correctly guessing that the price will go down, which is called going short. It’s generally regarded as a risky way of trading, more suited to advanced traders than beginners.
Note that the following is a general guide only. Individual trading platforms may have variations on these systems.
In its simplest terms, Bitcoin futures works by having you deposit some money into a Bitcoin futures exchange and buying Bitcoin futures with it. Profits or losses will be realised when a futures contract is sold, or when it expires naturally.
You will typically be able to keep track of your “realised profits” or “realised losses” on an ongoing basis, which shows an approximation of how much you would gain or lose if you were to sell a contract at the current time.
Functionally, this is similar to watching your balance rise and fall as the market does.
The exact way your total realised profits and losses will balance out depends on how many contracts of which kinds you’ve purchased, the contract size and specifications, and what the market is doing.
Some of the factors which will affect how your realised profits and losses move are:
Bitcoin perpetual futures contracts, or “perpetual swaps,” will typically track the spot price (the current market price) of Bitcoin.
Futures contracts with set expiry dates will often trade higher or lower than the current market prices, to account for the uncertainty of future Bitcoin prices.
Beyond speculation, futures trading can also be used as a risk management tool and a way of playing the market in more depth.
Futures contracts can be used to multiply profits, mitigate risks and profit from falling prices. They can also be a very quick way of losing money if you get liquidated, which can happen very quickly when using 100x leverage.
When you’re trading futures without leverage, the value of your futures contracts just rises and falls with the crypto markets as usual, according to your open contracts.
But when you’re using leverage, the money used to buy a contract serves as collateral and you’re essentially trading on borrowed money.
Just like leverage can help you quickly make more money on correct bets, it can also be a very fast way of losing all your funds on incorrect bets. If the markets go the wrong way, you can lose you entire deposit.
For example, if you’re trading with 100x leverage, then a price change of just 1% could be enough to wipe out all your collateral and trigger liquidation.
Different exchanges will often have different liquidation thresholds. For example, some might close your orders once you’ve lost at least 80% of your collateral, and account for fees in different ways.
A range of fees may apply, including:
Some traditional trading platforms now offer Bitcoin futures, as do a number of dedicated cryptocurrency exchanges and forex trading platforms.
Traditional exchanges that now offer Bitcoin futures include CME and Cboe.
These are used to facilitate trading during specific hours, in well-regulated, legitimate and largely transparent environments.
Bitcoin futures trading is never safe. The markets are prone to manipulation and unpredictable price movements. You can do everything right and still lose money. Some exchanges are also safer than others, depending on how reliable, regulated and legitimate it is.
How well regulated an exchange is depends largely on where it’s based. Some are largely unregulated, while others such as CME and Cboe are relatively tightly regulated.
But to a certain extent, Bitcoin futures trading is always at least a bit dangerous given the volatility. Even on a perfectly legitimate exchange, it’s possible to quickly lose money.
Compared to simply buying and selling Bitcoin, futures trading has some benefits and drawbacks.
Pros
Cons
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