Cryptocurrency futures recently just gained wide acceptance after their regulatory approval at the end of the year 2018. However, the trading of futures can be traced back to the 1840s when wheat buyers and sellers would agree on a price before the wheat was even produced to protect themselves against possible inflation or unforeseen price fluctuations in the future.
Cryptocurrency Futures (Source: Finyear.com)
At its inception, only those who needed the wheat would buy the wheat. But, as traders started seeing opportunities in the strategy, they began to trade futures contracts just for the sole purpose of making profits. These speculators were only interested in the hope that they would buy low and sell high or that they would sell high and buy low.
As expected, futures contracts evolved gradually as more people bought into the idea. Buyers and sellers started trading futures contracts before the agreed dates on them. Futures contracts gained so much relevance that people even started using them as collateral for bank loans. Now, in the 21st century, trading cryptocurrency futures allow traders to trade cryptocurrencies without having to own them.
Most especially, they offer an alternative to people in countries where cryptocurrency trading is banned.
How Does the Trading of Cryptocurrency Futures Work?
Trading cryptocurrency futures is quite different from trading cryptocurrencies themselves. Still, with cryptocurrency futures, the investor is susceptible to the same risks and rewards that come with the fluctuations of the market prices of those cryptocurrencies even though he does not actually own them.
Cryptocurrency futures allow their traders or investors to speculate on the future prices of the cryptocurrencies that underly them. The trading of cryptocurrency futures takes place via an exchange that is regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) in the U.S.
Since cryptocurrency futures trading revolves around speculating on the future value of a cryptocurrency without actually purchasing or selling it, its contracts are settled in cash without any cryptocurrency exchanging hands. As a result, the trading of cryptocurrency futures does not require a cryptocurrency trading platform or even a cryptocurrency wallet.
After a trader invests in cryptocurrency futures, he holds his position until the agreed date. If the price of the cryptocurrency at that later date is higher than the purchase price, he is then paid the difference in cash. This settlement price represents his profit on the futures contract. However, if the cryptocurrency price is lower than the purchase price on the delivery date, the trader makes a loss. Before you can trade cryptocurrency futures, you need to open an account with a registered broker.
10 Questions to Ask Yourself Before Trading Cryptocurrency Futures
- Do You Have the Knowledge? Trading cryptocurrency futures is different from trading cryptocurrency itself. Therefore, it is essential to learn how to trade futures before you risk your capital.
- What Is Your Trading Plan? Before trading cryptocurrency futures, you should have a solid trading plan. The plan helps you to determine your objective, the amount you’re willing to risk, etc.
- Can You Stick to the Plan? Your cryptocurrency futures trading plan has been meticulously reviewed through extensive research before you adopted it. Therefore, make sure you do not deviate from it while trading is ongoing.
- How Should You Choose A Broker? You may have to go through different brokers before you find the right fit. However, you can narrow the search by choosing a reputable, well-regulated professional brokerage firm to manage your trades.
- Are You a Good Researcher? Trading cryptocurrency futures also requires extensive research to learn its idiosyncrasies. Through technical and fundamental analyses, you should determine if a contract has potentials before investing in it.
- Have You Tested Your Trading Plan in a Demo Account? Some trading plans look flawless on paper until you try to execute them. Before trading cryptocurrency futures, first test your plan in a demo account to determine its feasibility.
- Do You Have the Capital? Trading cryptocurrency futures requires a significant amount of capital. Ensure you have enough capital to meet the margin requirements of the contract.
- Which Cryptocurrency Should You Choose? There are several cryptocurrencies that you can choose to trade. The most popular ones are Bitcoin, Ethereum, and Litecoin. However, most brokers deal with Bitcoin futures alone.
- Are You Ready to Take Huge Risks? Trading cryptocurrency futures is highly rewarding but it also comes with huge risks. Hence, decide wisely.
- Do You Have a Good Exit Plan? You may reverse your trading positions before their due dates. Having a good exit plan determines when that is necessary.
The information on this website and all associated literature are for educational and informational purposes. It does not constitute a fiduciary duty or obligation between Uncut Lab and you. Please consult your financial and investment professional for your specific situation.