Understanding Bitcoin Futures Trading (vs. Traditional Futures Trading)

Before you start trading Bitcoin futures, the important thing is to think carefully about whether you can actually make money with it. Futures derivatives use leverage and can generate returns that outperform the market in a short period of time.

However, profit always comes with risk. On the flip side, you could also lose all of your funds through futures trading. That's why, before trading futures, you need to understand the product accurately and set up a risk management strategy that suits it.

In this post, we'll take some time to understand how Bitcoin futures trading differs from traditional futures trading.

Key Takeaways

A futures contract is a legal agreement between parties to buy or sell an asset at a specific point in the future.
In traditional financial markets, futures trading is mostly carried out by accredited investors with substantial capital.
Crypto futures are traded online on derivatives exchanges, and since the market can be accessed even on mobile, more investors can take part.

What Is Futures Trading?

Before we begin, it's important to know what a futures contract is. A futures contract is a legal agreement between parties to buy or sell an asset in the future. Here, the two parties don't trade the actual asset; they trade a contract for that asset.

The difference between spot trading and futures trading

Futures trading first launched in 1710, and today it is very popular with both retail and institutional investors. The basics of the Bitcoin futures market and the traditional futures market are very similar, but there are some important differences.

Why Do People Trade Futures?

People take part in futures trading because they can use leverage. Leverage means using margin to increase your position exposure. Because leverage amplifies both gains and losses, it brings the opportunity for profit but can also lead to serious losses.

5 steps to trading futures on Binance

What Are the Features of Traditional Futures Trading?

Traditional futures contracts focus on commodities such as crude oil and gold, or on financial assets such as bonds and stocks.

Traditional futures trading is mostly carried out by accredited investors with substantial capital. Given the risks involved in futures trading, efficient and stable use of capital is essential to avoid a margin call, which happens when an investor has to top up the maintenance margin on a losing position. If the maintenance margin can't be met, the broker begins forced liquidation of the losing position.

What Are the Features of Crypto Futures Trading?

Just like traditional futures trading, crypto futures trading involves trading contracts based on an asset (longs and shorts) rather than the actual asset. Here, the underlying asset is a cryptocurrency such as Bitcoin, Ethereum or BNB.

Crypto futures trading takes place online on crypto exchanges such as Binance. Instead of trading through an institution, you can easily join the market from your own computer or smartphone. This allows more investors to take part in the futures market.

Binance Futures offers both quarterly and perpetual contract trading. Quarterly contracts expire and settle three months after launch, while perpetual contracts never expire.

Key Similarities

Traders in traditional financial markets and traders in crypto markets enter into futures contracts for two reasons: speculation and hedging.

1. Speculation

Whatever a futures contract is based on, many market participants trade futures to speculate. Through speculation, traders attempt high-risk trades.

For example, Bitcoin maximalists like Michael Saylor of MicroStrategy firmly believe that BTC will be the most valuable asset of the 21st century. Michael Saylor could then use leverage to open a long position through a futures contract. If his prediction is correct, the position will generate significant profit as Bitcoin's value rises over time.

2. Hedging

Futures can be used to hedge an underlying asset. If an investor thinks Bitcoin has entered a bear market, they can enter into a futures contract to protect their portfolio from a price drop. Even if they believe Bitcoin will grow over the long term, they can open a Bitcoin short contract to prevent short-term losses and make money while the asset is falling.

Hedging works the same way as in traditional financial markets. People who hedge hold hedging positions to prepare for a worsening macro market, bubbles, unexpected events, panic selling and so on. Futures contracts can act as insurance to protect an investor's funds.

Using leverage, traders can hedge a position amount equal to the entire value of their portfolio when the market looks likely to fall.

Key Differences

Traditional futures trading and crypto futures trading are used in similar ways, but their market structures differ greatly.

1. Regulation

The simplest way to understand the difference between traditional markets and crypto markets is the regulatory framework behind them. Traditional markets have standardized laws and systems in place to protect investors from fraud, market manipulation and the like, and to ensure the legitimacy of trades. This means every trade must be carried out under strict supervision, so trading requires several procedures.

Crypto markets are generally unregulated, and trading doesn't require supervision. Crypto exchanges offer faster and more diverse derivatives. Among them, perpetual contracts, which are futures contracts with no expiry date, are a special product found in the crypto market. Also, because crypto exchanges run 24 hours a day, investors can join the market at any time.

2. Trading Hours

One of the most obvious differences between the two markets is the hours during which futures contracts can be traded. For example, the stock market is closed for 13.5 hours every day, so even if an important outside event happens, you can't trade assets or change your positions. For assets like gold or oil, investors still have to go through a broker at specific times to secure futures contracts.

In the crypto market, you can trade at any time of day. The market never sleeps and is open to the whole world.

3. Size

As mentioned earlier, a major difference between traditional exchanges and crypto futures exchanges is the size of the market. In terms of value, traditional financial markets are far larger than crypto exchanges. The top two exchanges, CME and ICE, are each worth tens to hundreds of billions of dollars, and institutional investors, companies and retail investors take part in these exchanges every day.

In contrast, the crypto futures market has relatively little institutional participation and is made up mostly of retail investors. However, as cryptocurrencies such as Bitcoin, Ethereum and BNB have entered the mainstream, more institutional investors have begun to see crypto as an alternative asset class. Institutional investors such as BlackRock, which approved investments in two funds, have also started taking part in crypto futures markets such as Bitcoin futures.

Final Summary

Whatever market you trade in, it's important to understand the role and value of the product before investing. It's also important to understand market cycles and manage the risks that come with them. Using excessive leverage can quickly cost you your funds and get you liquidated. However, if you trade futures with a smart, well-built strategy, you may be able to earn significant profits.

Traditional financial markets are protected under the standardized supervision of gatekeepers such as governments and states. As a result, they can be stable, but the process is complex and slow. Crypto exchanges, on the other hand, let anyone join the market with nothing more than an internet connection. There is no third party between the trader and the exchange, and traders exchange contracts directly with other traders. The crypto market is known to be more volatile.

Wherever you decide to trade, we hope you make great profits!

Check out these other helpful articles on Bitcoin futures on the Binance exchange.

Caution

Crypto futures trading is a highly volatile derivative with a high risk of rapid losses. Prices can be extremely volatile on any given day. Because of these price swings, the value of your holdings can rise or fall sharply at any moment, and as a result you could lose all of the funds you put into a trade.

Therefore, you should never trade or invest more than you can afford to lose. Before trading, it's important to fully understand the risks involved, taking into account your funds, level of experience and risk appetite. If necessary, please seek individual advice from a financial professional.

Actual profits and losses depend on many factors, including but not limited to market behavior and movements and trade size. Past returns do not indicate future returns.