Cryptocurrencies are vastly different from their fiat predecessors. But just how different are cryptocurrency futures from more traditional futures contracts, such as those associated with commodities or equities?
Surprisingly, there are a lot of commonalities, namely the ability to get exposure to the price of an underlying asset without needing to physically hold the asset. In other words, investing in the price of Bitcoin without the need to actually acquire the coin itself.
That said, there are some subtle differences, which impact the way you might invest in a crypto future versus, say, a stock future or oil future.
We’ll give you the lowdown on this relatively new asset class to help you understand where it might fit within your crypto-based investment strategies.
In terms of the contract structure, a crypto future is no different than a traditional future. They are both agreements between two parties to buy or sell an instrument for a specified price at a future date.
As noted above, both crypto and traditional futures are based on an underlying asset. A Bitcoin future will be linked to the price that Bitcoin trades at. The same goes for any future, whether a stock, commodity or currency. Of course, determining the value for more niche cryptocurrencies isn’t as easy as determining the price for oil or copper — we’ll go into that later in the blog.
Both types of contracts utilize leverage, meaning you only need a portion of the capital to take on a particular position. As noted in my previous post, leverage is useful for maximizing your capital efficiency, enabling you to take bigger positions or spread capital across more positions.
Finally, crypto and traditional futures share the same purposes: risk management and speculation. On the risk management side, futures can help you protect the value of a position that you actually hold, whether it be a stock or ETH, at a relatively low cost. On the speculation side of things, if you believe that the price of a crypto coin is set to fall, futures enable you to actualize that sentiment.
Most of the contrasts between crypto and traditional futures stem from the relatively young age of the cryptocurrency markets.
Because cryptocurrencies have traded for only a few years at most, there is far less historical price data available to traders. This makes it much more challenging to run analysis on pricing trends, correlations between prices and other macroeconomic indicators, etc. Additionally, many niche cryptocurrencies are especially sensitive to market movements because they trade in low volumes. This can make pricing patterns difficult to identify.
At the moment, the cryptocurrency markets have been subject to far more volatility over the last year than most traditional markets. Though there are many underlying factors at work, newer markets tend to be more volatile while they find their footing. However, no market is ever free of heightened volatility — financial markets tend to become highly volatile when major macroeconomic or political shocks occur, as we saw with the 2008 financial crisis, Greece’s near default in 2011, Brexit or the last US Presidential election.
There is also a difference in the type of collateral that is required. Nearly every traditional future requires fiat, hard or financial assets as collateral — crypto isn’t accepted. For crypto holders, accessing traditional futures requires transferring coins into fiat, then posting collateral. Of course, EMX is changing all of that through its platform and the EMX Token, enabling you to trade traditional futures using crypto as collateral.
The inverse is somewhat true, with many crypto exchanges not accepting fiat for collateral. Those that do accept fiat face a different challenge: maintaining a balance between volatile crypto markets and fiat collateral. In other words, the wild fluctuations in crypto prices can force traders who post collateral in fiat to have to answer sudden and unexpected margin calls. EMX will have an innovative solution for these traders as well.
Volatility, of course, strengthens the case for futures in an investment portfolio. When deployed in the appropriate fashion, these contracts can help protect the value of crypto holdings and create new investment opportunities.
Given that cryptocurrency futures are far newer than their traditional counterparts, investors will have fewer resources to stand behind their trading strategies. That doesn’t mean that trading crypto futures will be more difficult, it just means that investors will have to act with more diligence and rigor.
Practice makes perfect, as we all know. Thus, we highly recommend joining our trading competition, which is set to start later this summer. By testing out your skills in simulated trading, you’ll build the confidence and expertise to handle all futures when we start live trading in Q4.
Whether five years old or five decades old, both traditional and cryptocurrency futures can be useful for a wide variety of trading strategies. The beauty of EMX is that you don’t have to choose — we will give you the means to trade both, in a far more flexible and dynamic manner than what’s currently available in the marketplace.