Futures are a type of derivatives contract that allows regulated trading between a buyer and a seller. It involves the agreement to exchange an asset on a future date at a specified price. It allows investors to make speculations based on the volatility of the crypto market, ensuring they can exchange a certain cryptocurrency at a specific price in the future.
However, when the price moves otherwise, the investor may sell at a loss or pay beyond its market price. Futures trading allows investors to gain indirect exposure to crypto-assets and make profits from their price fluctuations. Unlike spot trading, investors do not have to hold the asset to predict its future price. They can go long if they expect a price advance or go short if they anticipate a price drop.
Futures trading enables efficient use of capital as it supports leverage. It increases both the potential returns and otherwise of the trade. New traders are advised to use a leverage of 2x or 5x. Investors are given the opportunity and fluidity to grow their portfolios while hedging investments for profits.
Also, you must create a risk management strategy that would preserve your capital, aid practical expectations, and promote logical trading. Additionally, you must trade responsibly and continuously educate yourself to succeed as a futures trader. This trading utilizes leverage, margin requirements, and funding rates.
Leverage allows traders to open a position with only a percentage of the cost. An initial margin is the value of the trading position that is required to hedge a position. The maintenance margin is the minimum amount required to keep a position open. It helps in calculating margin utilization. It is checked regularly and liquidation occurs when the limit of the maintenance margin is reached.
The funding rate ensures the regular convergence of the index and futures prices. It is calculated using the difference between the spot and futures markets. While futures trading allows investors to bet on the market outcome of assets, the bet can be affected by the volatility of the assets. Although leverages are good, they can lead to losses. Futures trading gives traders a hedge over other types of trading.
Ethereum futures are contractual agreements reached by buyers and sellers to exchange ETH at a later date when it hits a certain price in the future. Ether is the involved asset and the contract derives its value from ETH. It represents a contract whereby the trade is settled in ETH or cash on an agreed date when the contract is executed.
Investors use it for hedging against the price volatility of Ethereum by speculating on its trend. It offers non-ETH holders flexibility, allowing them to bet on the prices of ETH and make quick profits. Positions can be opened with just a percentage of the total cost. Due to the highly liquid nature of Ethereum, it is less risky, allowing investors to enter and exit trades with little slippages.
Ethereum futures allow diversification via several trading strategies like short-selling, pair trading, arbitrage, etc. Ethereum futures are available on Binance, Chicago Mercantile Exchange (CME), Delta Exchange, etc.
However, before you invest in Ethereum futures, note the following factors:
- Expiration Date: It is the specified date for the contract to be settled between the two parties. In essence, the contract will be executed at the set price. However, traders can sell to other buyers before the expiration date. The expiration date is similar to the settlement date.
- Units of Contract: It is the cost of a contract compared to the underlying asset. It differs from one platform to another. For example, on CME, a contract is worth 50 ETH, in US dollars. CME Globex has a maximum order size of 100 contracts.
- Exchange: Certain exchange platforms offer Ethereum futures. When you buy an Ethereum futures contract, you are not buying ETH. Instead, you are agreeing to a contract that requires that you exchange ETH at a set price at a later date in the future. However before you choose an exchange platform for this purpose, you must consider some things.
You must ensure the platform is secure and safe. You might want to check if it has additional security measures. Also, check if it supports two-factor authentication. The exchange must have an insurance fund that shields investors from socialized losses. Some exchanges have several insurance funds to settle losses in extreme situations.
You must also consider the architecture and technology that the platform has in place to cater to a great trading experience and swift exchange. The volume and liquidity of an asset play a vital role in affecting transaction fees. Additionally, a liquid market has less risk.
As an active trader, you must consider the fees involved in your transactions. Understanding how an exchange structured its fees can save you some cost. You must know the difference between taker and maker fees. Lastly, you must consider the leverage and products offered by the exchange.
Tips for Investing in Ethereum Futures
To be profitable in Ethereum futures trading, here are some tips that would help.
- You need to develop a trading strategy. It would help you manage risk, trade consistently, and increase profitability. The strategy must include how you plan on opening and closing trade positions. Creating a strategy is one thing, sticking to it is another.
- You must set a stop-loss order on every trade you open. It would help you minimize losses and exit positions when they underperform.
- You must be careful not to overtrade. You overtrade when you open numerous positions or risk an unequal amount of capital on a trade, bringing risk to your portfolio. To avoid over-trading, you must follow your trading plan and stick to it judiciously.
- A golden rule of investment states that you should never invest what you can’t afford to lose and the same applies to this trading. Remember, cryptocurrencies are very volatile and trading irresponsibly can lead to enormous losses.
- Lastly, never risk over 5% of your capital on a trade, doing this will protect you from losing your capital in one position.
To make the most out of Ethereum futures, you need to keep learning and never chase the market. You need to understand how futures trading works to avoid losing your entire investment. Investment in cryptocurrencies is highly risky, so do your research before entering into it.