Contract Trading: A Beginner’s Guide to Crypto Contracts

Contract trading is a method of trading assets that allow traders to access a larger sum of capital through leveraging from a broker. In simple terms, contract trading allows traders to borrow capital to open trades with a larger margin to secure a potentially higher profit.

Also known as margin trading, contract trading a type of derivative — a financial instrument that derive their value from an underlying asset (stock, commodity, currency, etc). The derivative instrument can be traded independently of the underlying asset. In other words, you don’t need to own the underlying asset to trade contracts.

Margin trading is popularly used in the forex market where the market volatility is relatively low. On the other hand, the crypto market is highly volatile and presents a much more lucrative opportunity for traders to make larger profits (while also facing a potentially bigger risk).

How does contract trading work?

In contract trading, the trader will need to enter a margin — to commit a certain percentage of their trading fund to open an order. Margin trading are closely associated to leverage, whereby margin trading accounts are used to create leveraged trading.

For example:

You want to open a Bitcoin contract and trade 1 Bitcoin (at a current rate of 8,000 USDT), but you only have 800 USDT in your trading account. You can open a trade at 10x leverage, which means you are borrowing funds at a ratio of 10:1.

By opening a trade with a margin of 800 USDT and a leverage of 10x, you are effectively trading 1 Bitcoin (worth 8,000 USDT). Your potential profits (or losses) will be larger due to:

Your margin (800 USDT) + Borrowed capital (7,800 USDT) = Trade value (8,000 USDT).

When determining the price of Bitcoin, for example, there are two other key elements that traders should keep in mind. Those are the Bid and Ask:

• The Bid is the buying price
• The Ask is the selling price.

There are also three roles for agents who operate or interact with the prices in some ways — as market maker, individual speculator and arbitrageur.

When a contract trading position is open, the trader’s assets act as collateral for the borrowed funds. This is critical for traders to understand, as most brokerages reserve the right to force the sale of these assets in case the market moves against their position (above or below a certain threshold).

How does Long and Short trades work in contract trading

The biggest advantage of contract trading is that it allows traders to buy (Long) or sell (Short) the market. It gives traders full control of their potential profits, unlike HODLing a digital asset for long-term gains while being at the mercy of the asset’s price movements.

You can open both Long or Short positions in contract trading. This is how it works:

• A Long position is a trade that reflects an assumption or analysis that the asset’s price will go up (increase).
• A Short position is a trade that reflects an assumption or analysis that the asset’s price will go down (decrease).

Unlike spot trading, contract trading allows traders to open and close positions at a profit (or loss) in a much shorter frame of time. On SnapEx, traders can open trades based on 1 minute, 5 minutes, 15 minutes, and 1 hour charts.

Contract trading using digital assets like Bitcoin, Ethereum, and other cryptocurrencies

Contract trading, or margin trading, has been around for a long time. It’s the main method used by day traders to earn profits by trading on an asset’s price movements.

The cryptocurrency industry began with spot trading, where traders will buy and HODL a digital asset and sell at a later date when the asset’s price has increased. It’s a safer way of trading, but leaves the trader at the mercy of the asset’s price movements.

One of the most common problems with spot trading with cryptocurrencies is that these financial assets are fairly new. It takes time for the asset to mature and prove that their fundamentals work in the real-world, where it can move from a niche market to one that can be adopted by retail and institutional investors at scale.

With contract trading, a trader has full control over his trades, potential profits, and risk management. It’s an empowering and lucrative way to create a second income, or for some, a full-time income by trading in the crypto market.

The future of crypto contract trading

Towards the end of the last crypto bull run in December 2017, Bitcoin futures — a similar trading method to contract trading — was introduced on one of the largest exchange markets in the world, the Chicago Mercantile Exchange (CME). The debut of futures and options trading was widely considered to be a milestone for the development of the cryptocurrency industry.

Crypto contract trading is still seen as a high risk activity, mostly due to the current lack of regulation among countries no matter developed or not. However, due to numerous benefits such as adding extra liquidity to the market and reducing risks, experts predict that contract trading will eventually become more popular in the near future.

Many governments are also slowly adopting a more friendly approach to crypto and actively pursuing legislating cryptocurrencies in their respective countries.

It serves the market in several ways, including opening it to a wider range of audience even from anti-crypto governments and providing a relatively safer method for traditional institutions to join the crypto field.

Benefits of cryptocurrency margin trading

1. Lets you trade with more money than you actually have

The main benefit of using derivatives is leveraged trading. Leverage allows you to borrow money for trades. This means that you can potentially multiply your gains. The flip side to this, of course, is that any losses you take will be multiplied as well.

2. You don’t need to buy actual Bitcoins

The fact that Bitcoin contracts aren’t actual Bitcoins means that you don’t have to worry about the security issues around storing your Bitcoin assets. If a hacker gains unauthorized access to a bitcoin wallet and sends the funds somewhere, there’s no way to get those funds back. By trading contracts, you are only trading on the asset’s price movements without the need to buy, own and store the asset.

3. Faster trades

It takes time for a cryptocurrency network to process a transaction. Those transactions can be particularly slow and costly when the network is busy. By contrast, derivative contracts are processed immediately.

4. Lower fees

As the market matures and more people trade contracts, the competition among crypto trading platform increases. To attract more traders, these platforms will often lower their trading fees. On SnapEx, the transaction fees are among the lowest in the market — at only 0.15% per trade.

Prior to the 2017 crypto bull run that saw massive euphoria and wide coverage for cryptocurrencies in mainstream media. It brought a lot of attention, especially to Bitcoin and the potential these new, revolutionary asset holds for the future.

Fast forward to now, many margin trading platforms have mushroomed that offers a much more user friendly interface compared to Bitmex — arguably the most popular crypto margin trading platform for advanced traders.

SnapEx saw the potential of crypto contract trading and saw the need for a much more intuitive and easy-to-use product for contract trading. The platform was created for both beginners and experienced traders alike, with low fees, fair and transparent prices, and 24/7 dedicated customer and community support for all SnapEx traders.