Crypto Futures — A Primer
The opportunities to generate alpha in the investment world are stretched thin with the new tools investors have at their disposal. However, certain investment tools and prospects are still as viable as they were before, with the promise of great returns if smartly utilized.
One of these instruments, the Future, has found utility in the expanding world of digital finance, offering both decentralized and traditional investors the opportunity to invest speculatively or as a hedge. IndraDEX, will offer investors the ability to trade futures in a decentralized non-custodial way. This post is meant as an educational piece on the construct for investors that may not be as familiar with it.
What are Futures?
Futures are derivative financial contracts that enable the parties to transact an asset at a predetermined future date and price. According to the predetermined terms, the seller and buyer must trade the asset at the set price, regardless of the current market price of the asset.
The underlying asset can be a physical commodity or any other financial instrument such as cryptocurrencies. The Futures contract contains detailed information about the terms of the contract and typically exchange hands in a derivatives exchange.
In the traditional market, Futures generally represent tangible items such as crude oil, natural gas, corn, and wheat. It can also include stock index futures, currency futures, and precious metal futures such as Gold and Silver.
Cryptocurrency Futures
In the cryptocurrency market, Futures refers to financial securities that allow investors to use leverage and enhance their returns. Investors can use crypto futures to speculate on the direction of a digital coin or hedge their position against a negative movement in the future price. These are well-established financial instruments traded on various digital exchanges such as Deribit and Binance.
While trading cryptocurrency Futures, there are several things to consider:
Coin-Margined and Stablecoin-Margined Futures
This simply refers to the type of collateral accepted to establish a futures position. Most exchanges accept USDT or other stablecoin collateral. These are stablecoin-margined futures.
Some exchanges accept BTC or ETH as collateral and those are referred to as coin-margined futures.
Popular trading platforms, such as Binance offers both coin- and stablecoin-margined futures.
Perpetual vs Quarterly futures
The maturity date of a contract splits futures further into two categories — Quarterly and Perpetual Futures. Quarterly Futures, as the name suggests, has a 3-month maturity period. Whereas, Perpetual Futures does not have any expiration date and enables the traders to hold a long-term position.
Funding Rates
Another important thing to consider while trading futures is the funding rate. Funding rates are periodic payments to short or long traders based on the difference between the spot price and perpetual contract market.
The funding rate brings the perpetual futures contract price closer to the index price and is utilized by all crypto derivatives exchanges. Negative funding rates mean short positions pay the long positions and positive funding rates means that the longs pay the shorts.
This is the basic underlying mechanism that allows for the existence of perpetual futures with no expiration.
Auto-Deleveraging
Most exchanges have the notion of deleveraging or closing otherwise profitable positions because the counterparty is at risk of insolvency and not being able to make good on their losses. Open positions will typically have an ADL indicator that shows the probability of this occurring.
Leverage
Leverage means the ability to control a large contract value using a small amount of capital. The initial margin or performance bond is the initial investment that the trade must put up. Using leverage, the user can leverage up to sometimes 20x the margin or bond, when initiating a trade.
Risks and Opportunities
Like any investment tool, Futures also have their pros and cons. The pros include the ability to track the underlying movement of cryptocurrencies, hedging the token’s exposure, as well as the ability to leverage trade using a margin contract. On the other hand, it can be risky, especially with leverage.
Conclusion
Cryptocurrency futures can be a powerful tool to hedge risks or compound returns. One has to be cognizant of the risk and the opportunities while looking to add this powerful tool their trading arsenal.
Connect with us
We hope you enjoyed this post. Do let us know in the comments. If you’re interested in more details and participating in our token sale, please get in touch with me at gautam@indracryptocapital.io.
Twitter, Facebook, Telegram, Email, Medium, LinkedIn
Please leave your comments and questions about Indra Capital, YieldWallet, IndraX, IndraDEX, Airavat or anything else you’d like to talk about and we will be sure to get back to you.
