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What is a crypto contract? A brief explanation to help you understand!
Recently, some friends asked: What is a crypto contract?
In fact, contracts are the 'futures' of the crypto world, called Futures in English. But people in the crypto space insist on calling it contracts—why? Because each trade is like two people signing a 'future price bet'!
What does the contract actually mean?
Simply put, the essence of a contract is that two people disagree on the future price of a coin:
One person thinks the price will rise in the future and wants to go long;
Thus, the two people 'sign a contract' and take a bet. Whoever is right makes money, and whoever is wrong loses money.
Note that the unit of the contract is 'lot'; for example, buying 1 lot of the contract means you are participating in this 'price prediction game,' not that you are buying physical coins.
Another person thinks the price will drop and wants to go short;
How to play with contracts?
Let's take an example:
Assuming you bought a Bitcoin contract, and the current price is $30,000;
You selected 5x leverage, invested $6,000, and controlled a contract worth $30,000.
Next, you have two choices:
Going long: Expecting the price to rise, buy long;
Going short: Expecting the price to drop, buy short.
Profits and losses are directly linked to price fluctuations and leverage, for example:
Rising to $32,000: You earned $10,000 ($2,000 x 5x leverage);
Dropped to $28,000: You lost $10,000 ($2,000 x 5x leverage).
Finally, when you feel it's about time, you can 'close the position' (exit the trade) to lock in profits or cut losses.
Advantages of contracts
Potential to amplify returns: Play big trades with a small capital for substantial profits (of course, the risks will also be amplified).
Flexibly short: There are opportunities to make money even in a bear market, capitalizing on both rises and falls.
No need for delivery: You don't need to actually buy coins; you can settle directly through profits and losses, which is convenient and hassle-free!
The risks of contracts
Leverage risk: The higher the leverage, the faster the liquidation. A slight movement in the coin price can lead to a significant loss....
High market volatility: The crypto market is already volatile, and the contract market is even more exciting; you need a strong heart to play.
Funding rate: Perpetual contracts may incur fees, and over time, the costs can add up.
High complexity: For beginners, various rules and strategies in contracts can be a bit confusing.
How do beginners play?
Don't be greedy with leverage: Start with low leverage (2-5x), and don't go all in at 100x; save your capital to play a few more times!
Manage risks: Use stop-loss and take-profit to protect yourself; don't always think about 'betting one more time.'
Use 'tuition money' sparingly: Only use spare money to try it out, so that losses won't affect your life.
In conclusion:
Contract trading is essentially a zero-sum game. If you play well, you can earn quickly, but if you are not careful, you can easily get liquidated. Newbies should take it slow; if you don't understand, watch and learn more. Don't get chopped as soon as you enter the crypto space.
