What is Futures Trading in Crypto and How Does It Work?
The worth of the cryptocurrency market was USD 237.03 billion in 2019 which is up in value from 128.78 billion in 2018. The recent Bitcoin and ETH bull run pushed the market to an ATH of 1 trillion dollars at the time of writing as per Statista. Having said that, most people have taken the market fire as a FoMo moment. But lately, a new world is going abuzz, Futures trading at exchanges.
Most exchanges like PCEX Member have planned to adopt the same for giving better leverage to traders. So, if you wish to know futures in crypto, this piece will help you in getting everything that you need to know about it. PCEX Member as a top cryptocurrency exchange provides guides and DIYs to crypto enthusiasts and new traders to explore this domain.
Futures Trading in Crypto: Definition
Futures trading in crypto — as the phrase echoes — is an investment decision ruled by speculation of the crypto asset value at a certain point of time in the future often called as Expiry Date of the Futures contract. The buyer and seller — both have one single goal, i.e., to make a profit out of the trading.
Their contrasting directional views about the price of the underlying crypto assets, serve as the foundation of the trading, and the loss of one party is the profit of the other, and vice versa. The trading is facilitated by a crypto exchange platform like PCEX Member. It allows you to buy and sell crypto units in Fiat currencies like USD or INR. The seller at its sole discretion can leave the futures contract at any point of time by finding a suitable buyer for his or her futures contract.
Futures Trading in Crypto is similar to the futures trading that takes place at a stock or commodity market. Both markets operate under the same principle — demand and supply. When people are willing to pay more for a specific product, prices hike up; while prices drop when no one pays attention to it or more people sell their ownership of the said product.
Futures Trading: Crypto Vs Traditional Stocks
Higher ROI and greater liquidity than that of the traditional investment, along with widening acceptance of crypto, easy and simple international transactions, zero or low transaction fees, and anonymity and privacy has made crypto trading a better investment option for investors. Using PCEX Member, you can bypass the stockbroker or mediator and save on the transactional fee. Remember, a penny saved is a penny earned!
Futures Trading in Crypto: How Does It Work
Let’s see what happens when a crypto buyer expresses his or her interest and enters a formal futures contract through the trading terminal.
- Margin Validation
Margin is a sort of advance or token money. The Crypto exchange platform has a built-in feature to assess whether the buyer has sufficient margin money in his or her account to enter into the contract. In case of insufficient margin, it declines the request to enter a futures contract.
- The Counterparty Search
The exchange system scouts for a relevant counterparty match. The match has to be made between the buyer and seller of the asset at a future time. Like the traditional stock exchange, a crypto exchange serves as a cryptocurrency supermarket, where it’s easy to find participants with different views or speculations about the performance of crypto. A buyer thinks that the price will go up while the sellers think the opposite.
- Initiating Contract
The buyer and the seller digitally sign the futures agreement. By agreeing to buy (or sell) the futures agreement, one gives consent to the other to honor the contract specifications.
- The margin blocks
Once both parties have signed the digital contract, the margin is blocked in the exchange’s trading account, which means the margin amount can’t be used for any trading purpose until the expiry date or an earlier time when the seller opts out of the contract selling of his or her crypto assets.
Profit and Loss Scenarios
- Increase in Crypto Value
If the value of the crypto stands higher (at the expiration of the contract or any point when the seller decides to quit the contract) than what was at the time of initiating the futures contract, the seller of the futures contract makes a profit equivalent to the increase in the crypto value multiplied by the lot size.
- Decrease in Crypto Value
If the value of the crypto stands lower (at the expiration of the contract or any point when the seller decides to quit the contract) than what was at the time of initiating the futures contract, the seller of the futures contract incurs a loss equivalent to the decrease in the crypto value multiplied by the lot size.
No Change in Crypto Value
The transaction doesn’t lead to any gain or loss. Hence, neither of the parties earns or loses from the investment.
Note: The Lot size refers to the minimum number of cryptos that a buyer can purchase or seller can sell out.
PCEX Member provides a detailed view of Spot and Futures Trading by different cryptocurrencies. We help you invest wisely. Learn market insights of cryptocurrencies on PCEX Member to speculate with more precision about Futures trading value, and maximize your ROI.