Why Futures? A Primer For The Curious Cryptocurrency Trader

Posted by Ryan Hansen on May 7, 2018 1:55:00 PM


Since the rollout of Bitcoin futures last year, curiosity around derivatives has spiked among cryptocurrency traders. More and more, we’re hearing from traders who want to better understand futures, namely whether the contracts can provide a viable way to tap into non-crypto assets.

Futures contracts provide advantages that can enhance many elements of your trading strategies. From portfolio protection to opening up an array of new trading opportunities, futures can add depth and power to the way you put your crypto holdings to work.

Deriving value

We’ll explore the mechanics of futures in upcoming posts, but to quickly summarize: futures contracts are a type of derivative, which refers to any instrument that attains its value from another asset. In other words, the price of an oil future will be linked to (though not always mirror) the price of a physical barrel of oil.

When two parties trade a futures contract between each other, they are essentially creating an agreement to buy/sell an instrument for a specified price at a future date.

Creating opportunities in bull and bear markets

Futures open the door for trading opportunities in any market, no matter whether prices are rising or falling. That’s because with futures, you aren’t holding or trading the actual asset. In the case of cryptocurrencies, this means that your strategy can be more than just buying a coin and hoping the price spikes.

If your aim is to profit in a rising market, you can simply buy a futures contract representing X amount of coins and sell it once it has either reached your profit target or risk limit. But if the market is dropping and you want to sell short, you aren’t limited by restrictions, additional costs, or the need to borrow coins; you simply sell a futures contract and buy it back when you want to close the position.

This effectively means there is no such thing as a “bear market” for crypto-based futures — you can make (or lose) money when the market falls just as you can when it soars.

Trade more with less

Futures are traded using margin, which means that you don’t need to have 100% of the capital in order to take on a particular position.

For example, you could buy a contract that is worth 10 Bitcoin or 1,000 barrels of oil and would only need to post a fraction of of the total value in order to control the contract while you hold the position. This ratio is called ‘leverage’.

Traders use this leverage to maximize their capital efficiency and to either take larger positions or spread capital across multiple positions as part of a more dynamic strategy. Leverage is a powerful tool that can increase gains but can also magnify losses. When trading with leverage on traditional futures exchanges, you can even lose more money than you have in your account.

Liquid, global markets

The Futures Industry Association reported that 14.8 billion futures contracts were traded across global exchanges in 2017, encompassing almost every asset class imaginable: stocks, bonds, commodities and fiat currencies. Compared to cryptocurrency markets which often struggle with volume, the futures markets offer deep liquidity.

This makes it easy for you to get out in and out of trades when you need. It also means tighter bid-ask spreads, so you can execute trades at ideal prices.

With EMX, you will be able to trade futures on cryptocurrencies as well as equity and commodity markets, giving you access to the world’s digital and traditional markets on one platform.

Futures never sleep

Like crypto markets, futures trading on EMX will happen 24 hours a day, all around the world. You can trade anytime.

This is especially useful given that market-moving events can happen at all hours. No matter whether its a surprise crypto regulatory announcement or a political event that spikes volatility, the futures market is open for you to find new opportunities.

Protect what you have

While many traders use futures contracts to speculate, there is another important use for these derivatives: risk management.

Let’s say you own Ether and expect the price to go up over time but are concerned that a short-term fall could eat into your portfolio. The savvy trader could sell a futures contract to lock in their portfolio value and hedge against a market downturn. Since selling is as easy as buying in futures, you have vast flexibility to manage your cryptocurrency risk according to your investment outlook.

EMX makes it simple

As time goes on, cryptocurrency holders will want to do more with their gains than HODL. Futures are shaping up to be that bridge between crypto and other markets, opening a whole new world for traders to deploy their assets.

Being a crypto-native futures exchange, EMX will enable traders to access a variety of global futures contracts with their existing cryptocurrency wallets. With the need to transfer between crypto and fiat eliminated, one of the significant barriers-to-entry for crypto-based futures traders disappears.

Whether you’re a veteran or just starting to test the waters, futures contracts have the power to elevate the depth and sophistication of your crypto-based trading strategies. EMX aims to provide you with the access, tools and flexibility to trade futures in the most dynamic way possible.

Futures and options trading involves substantial risk of loss and is not suitable for all investors. Investors should understand the risks involved in trading and carefully consider whether such trading is suitable in light of their financial circumstances and resources. Past performance is not necessarily indicative of future results.

Topics: Why Futures?