Futures trading is popular in the cryptocurrency market because such transactions allow the trader to earn income regardless of the direction of price movement. At the same time, futures can be an effective way to hedge investments during periods of market decline.
While derivatives are highly profitable, especially when leveraged, losses can in some cases be greater than the initial investment.
Experts RBC-Crypto told what risks you can face when trading futures and how you can use them to protect your investment portfolio.
Futures is a contract, which indicates which asset and for how long, at what price is purchased. According to the head of the analytical department of AMarkets Artem Deev, the investor does not buy the asset itself, but the intention to acquire it at a certain price or sell it at a specified price.
The analyst clarified that as soon as the futures expires, the buyer fulfills the contract by buying or selling the asset at the previously indicated price. At the same time, the value of the futures asset may differ greatly from the current market price.
“If bitcoin is planned to be sold at $20,000, then after a while it will be sold at this price under this agreement, even if the asset has fallen in value by that time or vice versa,” Deev cited an example.
A futures contract does not fix the current price, but a prospective one. An investor, based on his strategy and forecasts, goes to buy such a futures contract in order to hedge the risks of a fall in the value of the asset, the expert added.
Cryptocurrency derivatives (futures and options) are an indispensable tool for hedging the portfolio part of investments in the CFA market during periods of price decline, says Viktor Pershikov, a leading analyst at 8848 Invest. According to him, selling BTC and ETH futures, as well as buying PUT options, are essential elements for successful cryptocurrency trading.
Pershikov noted that it is worth distinguishing between trading in crypto derivatives and hedging. The analyst explained that in the first case, the goal is to earn on the exchange rate difference of assets, while in the second case, the investor should strive not to earn on the sale, but to compensate for the drawdown of assets in the portfolio due to profit from short positions in derivatives.
Usually large players, funds and even exchangers resort to hedging, says Andrey Podolyan, CEO of Cryptorg. He gave the example of a company that has bitcoin to be sold in a few days.
“How to protect yourself from a possible drawdown of the exchange rate? This is where futures hedging can help a lot. You can open a short position on BTC. Thus, if the rate goes down, the hedger will earn the lost value of the cryptocurrency on futures and buy the necessary piece of bitcoin for this profit,” the expert said.
The main advantage of the futures market is the ability to earn both long and short, unlike the spot market, where only asset growth is important for traders, Podolyan noted. That is why the futures market attracts more and more traders, the analyst believes.
“Traders in the futures use the same range of strategies as in the standard financial markets. There are both long-term and short-term strategies, scalping, intraday and active bot trading,” Podolyan listed.
Leading analyst at 8848 Invest Viktor Pershikov identified three approaches in terms of futures trading strategies: day trading (intraday trading, one of the most difficult types of trading), swing trading (when transactions are held for 2-5 days in order to maximize profits from directional movement), and medium-term trading (most often, on perpetual futures).
The choice of approach depends on the skills and abilities of the trader, but it should be taken into account that the more frequent and small transactions a trader makes (especially with a poor p/l ratio in trades), the lower the probability of his success in the long run, the expert admitted.
“For futures trading, trends and the strength of price changes do not play a big role: futures can be bought and sold, earning on the price difference, and even in a calm market, without a strong trend. With the help of futures, you can earn money if you use moderate leverage,” Pershikov concluded.
Cryptocurrency futures are used for speculative purposes (in short-term trading), using leverage (with funds provided by exchanges), as well as for risk hedging, said Artem Deev, head of the analytical department at AMarkets. According to him, the first two options are still quite risky – in short-term trading, fluctuations in the value of an asset matter; using leverage, you can both gain a lot and lose a lot.
The expert is sure that futures contracts provide an opportunity to diversify the portfolio, pursue a more flexible trading strategy and hedge risks. But with the use of leverage, the risks increase significantly, since borrowed funds can help to acquire large amounts of an asset, but also to lose significantly in the event of a sharp change in the situation on the markets, Deev explained.
Leading analyst at 8848 Invest Viktor Pershikov agreed with him. He clarified that as part of his work, he does not use futures with a “leverage” higher than 1 to 3: in a highly volatile market, a high level of “leverage” leads to large losses, and in pursuit of high profits from operations, retail investors and traders, most often, they lose money in one or two unsuccessful trades.
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