What is futures trading? How is it different from derivatives trading?
Generally, the exchanges used by traders are roughly divided into "spot trading" and "derivative trading (futures, options)". To understand what derivative trading is, we must first know what spot trading is.
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Spot trading is the buying and selling of digital assets such as Bitcoin and Ethereum through real-time delivery. The assets become our account assets at the moment of transaction and can be transferred to other exchanges or on-chain wallet addresses at any time. You "directly" hold cryptocurrencies and can pledge, participate in voting, or perform advanced operations such as mortgage loans. Holding a digital asset can bring us more benefits, not just direct "trading profits."
Most spot trading strategies are divided into "short-term traders", "long-term coin hoarders" or regular fixed-amount investments based on the degree of risk and holding period to profit from them.
The essence of futures trading: the "right" to buy virtual currency without actually holding the currency
Futures are not the same thing. The profit direction is clearer. It is usually divided into two trading methods: "currency-based contracts" (reverse contracts) and "US dollar-based contracts" (forward contracts). The subject of trading in the futures market is a contract representing the value of the token. After the transaction, we do not "directly hold" the cryptocurrency.
We have no way to transfer the contract out of the exchange for any operation. It only represents our right to buy or sell a specific cryptocurrency at a specific time in the future. The purchase and sale of the contract is limited to the "same exchange".
The advantage of futures over spot is that there is an opportunity to make a profit regardless of whether the price rises or falls. The source of profit is determined by the trend of asset prices, not the increase in asset value over time. If traders expect future prices to rise, they can buy long contracts. If they expect future prices to fall, they can buy short contracts.
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Why do you want to go short? Besides being bearish on the market, what else can you do?
Generally speaking, short selling is a very difficult operation. The long-term trend, whether it is the overall economy, the market value of the cryptocurrency market or the development of the industry, is upward (otherwise it will cause social unrest and other crises). Short selling itself is an "anti-human" trading direction, and many traders buy short contracts with different strategies. Let us introduce them one by one:
1. Hedging
This strategy is suitable for when the overall market is falling. If we believe that this market decline is a short-term decline, but do not want to sell the assets we hold directly, we can buy short contracts of the "same value" as the assets we hold to hedge the value drawdown that the assets in our hands may face in this wave of decline.
Buy short contract -> market falls -> short position is profitable
The assets you originally held -> the market fell -> the value of your assets fell
2. Arbitrage
Arbitrage is a more advanced approach, which can usually be divided into two strategies: "spot arbitrage" and "funding rate arbitrage".
3. Introduction to spot-futures arbitrage
As mentioned before, the underlying asset of futures market transactions is a contract representing the value of the token, which means that the contract and spot value are not exactly the same, and there is usually a price difference. For contracts, according to different delivery dates, they can be divided into "perpetual contracts" that will never expire and "quarterly contracts" that will expire in the next quarter. The closer to the delivery date, the more the value of the two sides will converge. For Bitcoin contracts, when we find that there is a price difference between BTC-0930 (Bitcoin quarterly contract) and the current Bitcoin spot price
We can buy Bitcoin spot and short BTC-0930 at the same time to earn the price difference in the middle. The elements that need to be considered in this strategy are
How much is the premium?
Expiration time
Opening leverage size
It is particularly important to note that the size of the leverage unit itself cannot be too large, otherwise when the market moves in the opposite direction of the contract, the loss caused by the position may have the risk of liquidation. This needs to be controlled. If the position can be successfully held until the delivery date (09:30), this strategy can be successfully completed and a profit can be earned.
Funding Rate Arbitrage Operation Tutorial Introduction
The steps of funding rate arbitrage are similar to spot-futures arbitrage. When we observe that the funding rate of a particular currency is too high, we can arbitrage by "buying spot" and "shorting perpetual contracts to receive funding rate" or "borrowing currency and selling spot" and "going long perpetual contracts to receive funding rate". The elements that need to be considered are:
The premium of the spot and perpetual contracts: If the premium increases, it may cause losses when closing the position.
Funding rate changes: You need to regularly check the changes in funding rates. When market sentiment changes, you need to find a time to close your positions, otherwise you will end up in a loss.
Opening leverage size: The leverage unit itself cannot be too large, otherwise when the market moves in the opposite direction of the contract, the loss caused by the position may lead to the risk of liquidation.
Bitcoin short contract demonstration
Next, we will show you how to buy a short contract.
1. Select the currency you want to trade. Let’s take Bitcoin as an example.
We expect the BTC price to continue to weaken in the near future, so we want to short BTC through contracts, short 0.1 BTC. Before sending the order, we can also confirm the liquidation price of this position, the leverage size, and take risk control measures.
2. Check the parameters such as leverage size
After the position is established, you can see the opening price (entry price), current price (mark price), unrealized profit and loss (profit status), number of positions, leverage multiples, liquidation price, etc.
3. Close positions
If the price reaches our expected price, or has reached our stop loss level, we can choose to close the position to settle the profit or loss. If we want to set a conditional order first, we can create an advanced pending order through "Set Take Profit and Stop Loss". By selecting the appropriate multiple, we can see the price provided by the system, which can help us find the appropriate opening price faster.
Conclusion: Contract trading is high risk, novices should understand the details before entering the market
Trading derivatives requires more financial knowledge and risk control than spot trading. You should try it on a small amount before you fully understand it. The advantage of leverage is that you can achieve relatively high returns with relatively small funds.
