According to a report by quotes website Coingecko, in March 2023, the global cryptocurrency market had a total trading volume of $2.95 trillion. Of this, 74.8% came from cryptocurrency derivatives transactions, while the volume of spot transactions that took place on centralized and decentralized exchanges accounted for only 25.2%.
There is no doubt that cryptocurrency derivatives trading has been the most popular trading product in the cryptocurrency market.
In this course, we will start with basic concepts, introduce contract trading in cryptocurrencies, learn to master the basic terms used in contract trading, and learn how to open and close positions around the Bitunix perpetual contract product.
Futures Trading in Cryptocurrency
Futures Contracts
A futures contract is a margin trading transaction conducted through leverage. Futures contracts allow investors to take higher risks while gaining from the price fluctuations of different underlying investments. Margin trading uses the principle of leveraged investment, which allows for the use of small amounts of capital as collateral to amplify potential profits while trading, allowing even small investors to trade with high returns in the financial markets. However, it is important to note that futures contracts can also magnify the risk of potential losses.
Unlike spot trading, when trading contracts on the futures market, no transfer of the underlying asset actually takes place. When trading a BTC/USDT contract, the trader is not actually buying or selling BTC, but rather trading based on the projected value of BTC. That is, the trader is betting on the price movement of BTC parallel to the value of the contract, without owning the BTC asset.
Simply put, the contract acts as a cryptocurrency derivative that allows users to gain from rising or falling digital asset prices by judging the ups and downs and choosing to buy long or sell short the contract.
Perpetual Contracts
A perpetual contract, or perpetual future, is actually a type of futures contract, but unlike traditional futures contracts with a delivery date, a perpetual contract has no delivery date and traders can choose to hold it for as long as they wish. The perpetual contract is also an attractive derivative for traders looking to hedge their spot positions or to speculate on various asset prices.
The perpetual contract is currently the dominant derivative traded on many cryptocurrency exchanges, with some offering leverage of up to 125x.
As a type of derivatives trading, perpetual contract trading offers traders the option of leverage, with the help of which they can trade on margin and thus expand their potential profits. However, this type of margin trading (i.e. the user trades with borrowed funds) increases the risk of investment, i.e. the possibility of liquidation of the margin. For this reason, perpetual futures are also considered high-risk assets.
Option Contracts
An option contract is a derivative that gives a trader the right to buy or sell an asset in the future at a specific price. Unlike a futures contract, however, there is no obligation for the trader to settle the contract between options contracts.
Option contracts, or options, are actually very similar to futures, as they both include an agreement between two parties to buy and sell a specific cryptocurrency at an agreed-upon price and date. But the holder of an option contract does not necessarily have to exercise his or her right to buy or sell on the expiration date. To enter into an options contract, traders must pay a margin. If they do not want to exercise their rights at the end of the contract, they must still pay the margin.
Options contracts can be divided into two main types: call options as well as put options:
Call option: A call option allows you to buy a specific amount of a certain cryptocurrency at a specific price for a certain period of time or point in time in the future.
Put option: A call option allows you to sell a specific amount of cryptocurrency at a specific price within a certain period of time or at a certain point in time in the future.
The difference between futures trading and spot trading
Spot trading is one in which delivery is made instantly during the buying and selling process. Take BTC-USDT trading pair as an example. During the trading process, the trader sells 100USDT to get the equivalent value of BTC. After the transaction is completed, the trader no longer holds the sold USDT, but the equivalent value of BTC is worth 100USDT. The trader has direct ownership of that part of BTC and enjoys the right to participate in community voting.
Spot trades are usually long (calls) while short (puts) trades are usually done with the help of leveraged trades.
Contracts are bought and sold to represent the value of a specific crypto asset. The trader does not own the underlying crypto asset in either a long or short position. Therefore, the trader holding the contract does not have the right to vote or participate in staking.
Features of Futures Trading
Leverage: Contracts trading is essentially margin trading. Through leverage, traders can take larger value positions with a fraction of the margin.
Two-way Positioning: Contract trading allows users to take long or short positions, allowing traders to profit from the right position whether the market goes up or down.
No ownership of assets: Contracts are essentially derivative instruments with price anchored spot prices, and holding a position in a contract does not hold the underlying cryptocurrency in which the contract is invested.
Summary
For beginners who are new to cryptocurrencies, spot trading, which is easy to get started with, is probably the most appropriate way to go. For experienced traders who are willing to take risks for high returns, including perpetual contracts would be a relatively suitable option.
Disclaimer
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Crypto investment involves significant risks. Please proceed with caution. The course shall not be considered investment or financial advice.
Next: Lesson 2 - Introduction to Perpetual Futures on Bitunix