In this article, we would address the following;
Trade bitcoin futures contracts
Trading activity and price discovery in bitcoin futures markets
How to trade bitcoin futures
Bitcoin futures trading hours
Trading bitcoin futures markets and more...
The majority of traders commit these three crucial errors, despite the fact that cryptocurrency traders prefer to "ape" and make "degen" investments utilizing huge leverage in futures markets.
When trading bitcoin futures markets, there are three significant pitfalls to avoid.
EXPLAINED
Particularly when it comes to trading bitcoin futures on derivatives exchanges outside the world of traditional finance, many traders regularly voice some very significant misunderstandings. The most frequent errors concern fees, the effect of liquidations on the derivatives instrument, and the price decoupling of futures markets.
Let's examine three common blunders and myths that traders should steer clear of while dealing in crypto futures.
Spot trading and derivatives contracts have different pricing and trading structures.
Retail traders and seasoned fund managers utilize these products to leverage their crypto positions, and the total open interest in futures contracts in the cryptocurrency market already exceeds $25 billion.
Contrary to popular belief, futures contracts and other derivatives are frequently used to lower risk or expand exposure rather than for irrational gambling.
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In crypto derivatives contracts, some discrepancies in pricing and trading are sometimes overlooked. Trading in futures markets should thus at the very least take these disparities into account. Even experienced investors in traditional assets who use derivatives are prone to make mistakes, therefore it's critical to comprehend the unique characteristics before utilizing leverage.
Even though they offer USD rates, the majority of cryptocurrency trading firms do not really employ US money. This is a significant unreported fact that puts derivatives traders at risk and is one of the problems that they encounter while researching and trading futures markets.
Clients don't really know if the contracts are priced in stablecoin because there is a serious lack of transparency in the market. However, given that using centralized exchanges always carries the intermediate risk, this shouldn't be a huge worry.
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Discounted futures can occasionally be unexpected.
On September 9, spot exchanges like Coinbase and Kraken began selling ETH futures that mature on December 30 for $22, which is 1.3% less than the current price. The distinction arises from the possibility of Merge fork coins during the Ethereum Merge. No free coins that Ether holders could get will be given to the derivatives contract's buyers.
Since holders of derivatives contracts won't get the prize, airdrops can also result in lower futures prices, although there are other reasons for a decoupling since each exchange has its own pricing structure and hazards. For instance, Polkadot quarterly futures on Binance and OKX have been trading cheaper than the current exchange price for Polkadot (DOT).
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Increased costs and price decoupling should be taken into account.
Leverage, or the capacity to trade sums greater than the initial deposit, is the main advantage of futures contracts (collateral or margin).
Let's take the example of an investor who deposits $100 and purchases Bitcoin (BTC) futures worth $2,000 utilizing 20x leverage.
Even while trading costs for derivatives contracts are often lower than those for spot securities, a hypothetical 0.05% charge is nevertheless imposed on the $2,000 transaction. As a result, the cost of entering and leaving the position once will be $4.00, or 4% of the initial investment. Although it might not seem like much, the cost grows as the turnover rises.
Even though traders are aware of the additional expenses and advantages of employing a futures instrument, an unknown component usually only surfaces under erratic market circumstances. Liquidations are often the source of decoupling between the derivatives contract and the ordinary spot markets.
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The derivatives exchange includes a built-in mechanism that terminates the position when a trader's collateral stops being enough to cover the risk. This mechanism of liquidation might result in abrupt price changes and a resulting decoupling from the index price.
Even if these inaccuracies won't lead to more liquidations, uneducated investors may respond to price changes that only occurred in the derivatives contract. To be clear, the derivatives exchanges get the reference index price from external pricing sources, often from conventional spot markets.
There is nothing wrong with these distinct procedures, but before utilizing leverage, all traders should think about their influence. Trading in futures markets requires consideration of price decoupling, greater costs, and liquidation impact.
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