While futures were originally reserved for traditional financial markets, the cryptocurrency industry has embraced them as well. These are financial instruments that make it possible to predict the variation of a digital asset on a given date, either upwards or downwards.
Futures are not intended for those new to cryptocurrency as their operations are relatively complex. In the context of this article, however, we will try to explain to you how this financial instrument works in the most understandable way.
Difference between futures and spot
When a person goes to an exchange to buy a cryptocurrency, they are usually exchanging money or some other digital asset to receive this virtual currency. In this case, he owns the crypto and it belongs to him. This is called a spot.
The future works differently. A future is called a forward contract, i.e. it has a fixed term in time. On a certain date, this contract expires and the two parties bound by this instrument must buy or sell the underlying asset (cryptocurrency) at the price agreed upon in the contract.
Throughout the future validity period, it is possible to exchange it with other people, just like you can with a cryptoasset bought using the spot method. However, when you buy a future, you must put down a deposit, called margin, to guarantee that you will honor the terms of the contract when it expires.
What are the advantages and disadvantages of futures?
Futures are financial instruments that we do not recommend for beginners. The risk of making a mistake while collecting them is extremely high and can lead to financial loss. So we suggest you to have minimum knowledge of how these financial instruments work.
The only advantage we find in futures is that they allow us to practice what we call “shorting”, i.e. betting on a fall in cryptocurrency prices. If you think Bitcoin is overvalued, it is possible to buy a future that predicts its downside.
In terms of difficulty, there are several negative points. First, it is a financial instrument that works only in the short term, as it has an expiry date. If you want to invest for long term, it is better to use spot. There is a case for perpetual future, but it is beyond the scope of this article and so we will not discuss it.
Then we can quote leverage. If this may be attractive in classic markets where volatility is low, it is not in the world of cryptocurrencies. In fact, it has already happened that the latter sometimes loses or gains 40% in one day. Using 2.5X leverage, down or up, means your position would have gone to zero and you would have lost all your money.
Many sites do not hesitate to offer leverage effects sometimes up to 100X. As much as you can tell that with the volatility of the crypto market, it is guaranteed destruction using a multiplier. So we recommend that you don’t touch the lever unless you are an expert in the field of cryptocurrency. As a concept, almost no crypto trader uses leverage because the volatility of these underlyings is high.
Conclusion on the future
Although we had to make some simplifications to make our explanation of futures easier to understand, we hope you now have a better understanding of these financial instruments.
We like to repeat it again, but futures are reserved for advanced level crypto investors. If you don’t fully understand how the future works, you risk making a lot of mistakes that will cost you a lot of money.
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I discovered the world of cryptocurrencies in January 2018. Arriving at the worst time to invest, I have never stopped training since then and now share my knowledge to facilitate crypto adoption.
