Are you a cryptocurrency trader who thinks that the volatility of cryptocurrencies has made you crave simple trading? Do buy and selling cryptocurrencies seem to be burdensome to you? Then you must try Crypto Futures Trading which is meant for volatile digital assets like cryptocurrencies. The crypto futures trading includes “long” and “short” crypto trades which may sound complicated but are the most useful trades that will help you generate more profit from the price movements of an asset without the need to hold it yourself.
Are you overwhelmed with all this information? Calm down, let’s understand each of them in detail in this article. Firstly, let’s understand more about crypto futures.
Crypto futures are a form of contract or commitment between two parties to either buy or sell an asset on a predetermined date at a pre-established price. The agreement keeps a track of the digital token. Futures contracts allow traders to stake upon the future price of an asset. Traders can either choose long where they can bet on a price in advance or choose short if predictions are the price will fall.
Traders who choose long trading will agree to buy the asset on a specific date and it will be vice-versa for short-sellers. On the contract’s expiration date, the parties will settle and the contract closes. In some crypto futures, markets offer leverage where traders can borrow capital to fund the contracts. In short futures trading, leverage grants exposure to larger positions without the need for funding the position upfront.
Traders who choose leverage need not match the total value of the contract as they can use it to secure a contract with a smaller equity stake; it is known as initial margin. If the position moves against the trader, there is a maintenance margin level that must be followed to keep the position open. If a breach happens at this level, it will result in the position being liquidated.
Now that we have a brief idea about crypto futures, let’s understand the futures trading concept.
Let’s take an example to understand the futures contracts. Suppose the price of a cryptocurrency is $1000. A trader predicts this price will increase in value and buys 5 futures contracts. Now, the position value of this currency will be $5000. The trader’s predictions were right as each contract is worth $2000. Now, the trader can sell the 5 contracts for $10,000 earning a profit of $5,000.
In short futures trading, the trader will sell the 5 futures at $1,000 each, resulting in a total amount of $5,000. When the price drops to $500, the trader will repurchase the 5 contracts at a value of $2,500, keeping a profit of $2,500. For some traders, this method may be appealing than directly buying Digital Tokens.
Long & Short Trading
Long and short trading appear when you believe that a cryptocurrency will rise or fall in price. “Longs” and “Shorts” are not the most technical terms in crypto but they are the core of trading. Both trading types represent the two possible directions in which you can generate profit.
In long trading, you will hope for the price of the cryptocurrency to increase from a given point. The terminologies used will be “long” or “buy”. Both represent the same meaning. Conversely, in short trading, you expect the price to fall from a given point. The terminologies used here will be “short” or “sell”. Both represent the same meaning.
You can long or short a cryptocurrency without having to buy or sell it. It is possible on derivative exchanges that offer futures, options, contracts for differences, and other derivative products. When you trade such derivatives, you can long and short crypto without physically owning or dealing with them.
When the market is bullish, you tend to choose to long crypto to profit from the price ascension. While the market is bearish, short positions will exceed long ones. Notably, it is just an observation and not a rule to follow. Professional traders and investors usually buy the dips and sell the rips. It means traders will long positions when crypto price retreats from recent peaks. While they sell crypto when the price tests resistance levels.
How to short cryptocurrency?
The goal in shorting cryptocurrency is to make money and use resources to grow your profit. Let’s take an example to understand this concept in detail. Suppose you short Bitcoin when the price of 1 BTC is $1000. Now, you borrow 5 BTC where your total value will be $5000. You are now short of 5 Bitcoins.
Suppose you are a seasoned trader and in the future, you predict that its price will drop and 1BTC will be equivalent to $800. You seize this chance and purchase bitcoins worth $4000 and pay the loan you borrowed. As you haven’t used any resources, you made $1000. But, you need to borrow before you start.
There are various ways to short cryptocurrencies, let’s understand each of them:
- Limiting your Exposure
Short-selling can be a great technique to generate profits while the losses can be unforgiving. If the prices were to drop, you could make more profits. You can make the highest profit when the price of the currency falls to zero. It means you need not pay anything for the loan you took while keeping the profit you earned.
Conversely, if you short-sell 5 BTC for $5000 when its price was $1000 you will be in debt. Bitcoin is too volatile, if its price pumps to $3000, then you will have to repay $15000 for 5 tokens you borrowed. Hence, you are at loss.
Suppose you deposit $2000 worth of BTC in a decentralized exchange and leverage on a ratio of 1:2. Irrespective of the direction of price movement, it will be multiplied by 3. It also means that you can short-sell $4000 in BTC which is more than the deposited amount.
If the price of BTC falls to $500, your profit will increase to double, i.e. $1000. Leveraging can result in both losses and gains. If the price of BTC rises by $500, then your loss will be amplified to $1000.
Cryptocurrency exchanges will have an idea that you will be leveraging using the money you don’t have. If the price of a cryptocurrency goes against your predictions, some exchanges will automatically close at a certain point. Exchanges protect traders from huge losses.
How to long cryptocurrency?
When you want to long cryptocurrency, you will place a bet that the price of the digital asset will increase. If it rises, then you gain profit. If it drops, then you will make a loss. The process of longing for cryptocurrencies is quite simple, to fund your long, you will require your funds or some borrowed funds. Combining these funds will help you buy cryptocurrencies.
Once you buy cryptocurrency, the next step is to sell them for more than the buying price. You may or may not make a profit based on the crypto price. Once the trade is closed, you should pay back the borrowed funds in full, irrespective of the trade outcome. If the cryptocurrency price drops, you can sell the cryptocurrency but for a lesser price, resulting in losses.
Let’s consider an example to understand this concept better. Suppose the price of BTC is $10,000. You open 1 BTC with 10x leverage at $10,000 using BTC as your funding cryptocurrency. $1000 will be taken from your account as margin and the rest of $9000 will be borrowed from the exchange.
Now, the price of Bitcoin will rise to $11,000 and you will want to close the trade. 1 BTC will be $11,000 making a difference of $1000. Even you return the $9000 you borrowed, you will have earned $1000 where you will have to pay trading fees and some interest.
Leverage represents the amount you want to borrow to execute your trading position. Leverage is a proportion of the size of the trade. Suppose you open 1BTC with 2x leverage, you will have to borrow 0.5 BTC from an exchange and the remaining 0.5BTC will be from your wallet.
If you wish to buy 10x leverage for 1BTC long, then you require 0.1BTC from your end and the rest can be borrowed. With leverage, you can increase the size of your position with the help of existing capital. As your position is larger, you will be more exposed. As risks are larger, you should be very careful.
If you’re wondering where to perform futures trading, you can go with any of the exchanges as all the exchanges offer future trading with a detailed guide of how to perform it. If you know all the basics, it will be much easier for you to perform futures trade. Also, always trade when you are confident about it. Never invest more than you afford to lose.