Achieve big profits in a regulated market with little capital investment — the scenario possible with futures trading. Thanks to low-security deposits, sometimes as low as 5%, large sums can be moved in futures trading. Today a lot of people invest in crypto futures and get a profit. But what are futures, and how to use them?
Crypto futures are contracts between two parties stipulating that the underlying asset will go to another owner at a particular time. Similarly, the covenant sets the price at which this future deal will take hold. The contract is considered executed when it reaches its expiration date when the futures holder is obligated to buy or sell the underlying asset at the agreed-upon price.
Although futures can be held until expiration, many speculators and traders prefer to buy and sell contracts on the open market before expiration.Traders very often use different options to work with contracts. As a rule, specialists have three basic actions to exit their positions. These are the ways an investor can use to trade. One of the popular exit schemes is netting. It means that the trader closes his position. But after closing, the trader creates another class with value and size.
Although futures contracts are derivative, they differ from well-known derivatives, such as options and futures. Options allow the trader to buy an asset at a particular time but do not require him to do so. Thus, an option can be withdrawn, whereas the execution of a futures contract is a requirement.
Several different types of assets can be traded through futures contracts, such as fiat currencies, stocks, indices, government debt, and cryptocurrencies.The use of futures is not limited to cryptocurrency. Today, futures trading extends from oil to agriculture.
On the other hand, cash settlement does not involve a direct transfer of the investment. One of the most common examples of futures is bitcoin. It is a market that is still in demand among investors. The underlying cryptocurrencies remain safe for investment. Thus, you are not selling “real” BTC but only representations of the cryptocurrency.
On the one hand, futures serve as hedges for companies that want to lock in prices in the future. On the other hand, they are mainly used for speculation. The number of traded derivatives is many times greater than the volume of available raw materials.
Thus, there are more derivatives on underlying assets than there are underlying instruments available. As a result, the market for some commodities is artificially inflated, which may negatively affect the economy or the people who depend on these commodities.
But futures are not only an attractive financial product for speculators. Private investors also have indirect access to futures exchanges through ETFs or ETPs and thus can benefit from them.
In particular, commodity futures, which reflect the underlying asset’s price very well, can be an exciting addition to your asset allocation as a small piece.
Advantages include lower capital requirements to trade futures than directly dealing with the underlying asset. This can lead to a leverage effect as the trader often uses additional external capital, i.e., trades “on margin.”
Another advantage of futures contracts is their function as a hedging instrument. As part of hedging, risks to companies and investors can be reduced or eliminated by using futures contracts.
Price movements can be amplified by the effect of leverage in both directions and have positive and negative consequences for the investor. Depending on the investor’s deposit structure, crypto futures trading contracts may result in losses above the initial margin. Therefore, consistent risk management is necessary when dealing with futures contracts.
In addition, a company that uses futures to determine its future oil purchase prices, for example, can no longer benefit from falling oil prices.
In the case of futures, institutional investors, in particular, rely on futures exchanges depending on the rise or fall in underlying asset prices. These include stocks, bonds, foreign currencies, and commodities such as wheat or oil. Retail investors can only invest in futures under certain conditions; It is much less risky to profit from futures trading through exchange-traded funds (ETFs). The wider they are spread out, the easier it is to avoid losses.
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