© Provided by The Financial Express Digital-currency By Gaurav Dahake
Crypto is nothing new for the majority of us. The segment has been a topic of constant conversation and scrutiny in recent years but extreme volatility, recent downfall, and heavy government intervention have raised a wave of skepticism amongst investors.
Despite all the speculation, recent times have witnessed a steady growth in the number of crypto enthusiasts. But there is a dearth of seasoned crypto traders in the Indian market. While high instability has been a major reason, the lack of different trading products like the stock market has also limited the investor appetite for crypto. To address this very challenge, exchanges are now introducing futures trading in crypto.
Futures trading across the markets have been one of the favorite asset streams of investors due to its high affordability and high return potential. In 2021, 29.28 billion futures contracts were traded worldwide, up from 12.13 billion in 2013, according to Statista.
The real stock or commodity being traded is seldom exchanged or delivered apart from the times when one trades to hedge against a price hike and takes delivery of the stock or commodity on expiration.
Futures are usually paper transactions for investors interested solely in speculative profit. This makes Futures an easy product to trade than to hold crypto which needs to be kept track of and stored someplace (even if only as an electronic record).
What is Futures? What does Futures Trading mean in crypto?
In crypto, futures means agreeing to buy a particular cryptocurrency at a specific price at a time in the future, regardless of the price when the time comes. The decided time could be as less as a day to as long as multiple years. This is mostly referred to as gambling since the parties involved in the transaction mainly base their trades on speculation of how the asset price will perform in the future, thus the name futures trading.
One must be aware of common terminologies of futures like Leverage, Margin Requirements, Funding rates, etc. Understanding futures as a concept at a basic level is imperative to start investing in crypto derivatives.
Pros and Cons of Futures Trading in Crypto
Pros
Potentially high rewards model
There are more than 20,000 cryptocurrencies in the world today, with each having its own specialty. But one thing that remains common for all these is the volatility in the prices and the constant scrutiny. So, investing in crypto through the futures due to its unique model can offer hefty returns based on the constantly changing demand-supply dynamics.
Unbeatable Secure Network
Blockchain is popular for its encrypted and nearly hack-proof technology which helps keep your investment secured. Due to the fragmented or decentralized nature, blockchain cannot be easily hacked from a single system rendering it almost unhackable.
Cost Effective
Owning all crypto tokens can be very expensive. However, one can own a variety of cryptos with futures without having to individually purchase each one of them. This can give you access to unlimited profit with comparatively lower investments.
Cons
High Volatility
Be it spot trading or investing through futures, the basic nature of crypto is extreme volatility. While it can act as a blessing and give an instant wealth boost to your investment, it can equally torment them when the markets are declining.
Risky Leverage
It is very important to devise a strong risk management strategy to start futures trading which can be difficult for new enthusiasts.
Crypto derivatives trading is an easy way to speculate on digital assets' future valuation. It can be profitable for people who have proper knowledge and risk management strategy. However, the key to successful trading of any sort lies in research and a robust strategy.
Conclusion
The derivatives market makes up 69% of total crypto volumes, up from 66% in June 2022, and helped boost overall crypto volumes on exchanges to $4.51 trillion in July 2022, according to CryptoCompare.
Crypto derivatives have functions that go beyond an individual trader's investment portfolio. They are a part of a mature financial system and thus, play an important role in promoting the crypto industry as a familiar asset class.
The author is co-founder and CEO, Bitbns
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