Many think about taking physical ownership of some bitcoin when it comes to crypto trading. However, many trading volume for crypto on a daily basis doesn’t involve the transfer of ownership of these assets. Instead, much of the trading that occurs on exchanges is done through what effectively amounts to betting on derivative products. These financial products allow parties to bet on the price of an asset at a specific point in the future. The owner of the futures contract at the time of the contract’s conclusion is the one who has the power to take delivery of the asset in question.
So, someone who is trading in bitcoin futures is effectively agreeing to take delivery of some bitcoin at a predetermined time in the future. One could imagine this being particularly useful for miners who are able to sell contracts on their Bitcoin to be mined in the future. In this way, the miners are essentially buying insurance on the future value of the crypto asset that they generate. However, bitcoin futures trading can get much more complex than that, and the availability of this advanced trading method is worth considering when searching for where to buy bitcoin.
Advantages of Crypto Futures Trading
There are a few different reasons as to why a trader may opt for futures trading over spot trading in the crypto market. First of all, bitcoin futures trading is available on highly-regulate exchanges such as the Chicago Mercantile Exchange (CME), which is regulate by the Commodities Futures Trading Commission (CFTC) in the United States. This is a high degree of regulation that is not available nearly anywhere else in the crypto market. Even some of the safest and most secure crypto exchanges that work closely with regulators do not come with the same level of investor confidence as trading on the CME.
There is also a high degree of user friendliness that is available with bitcoin future trading. Since it is only contracts that are trade and not physical bitcoin, the user does not need to worry about taking custody over their own coins and securing them in a proper crypto wallet. Additionally, the user does not need to worry about an exchange operator or hacker stealing funds out of their account (at least when a reputable exchange is used). On top of the safety advantages in terms of funds security, there are also position and price limits that can help traders manage their risk in terms of volatility.
Is Bitcoin Futures Trading Similar to Margin Trading?
The first way traders are able to make money off the futures market is by trading them. Many traders who participate in these markets also practice margin trading. However, one should note that these two trading options are not the same. As mentioned previously, a futures trader is trading a contract on a future delivery of an asset. With margin trading, the trader actually takes ownership of the underlying crypto commodity.
Both of these trader techniques allow users to gain heavy exposure to a crypto asset’s price volatility. Next, they would be able to via simple spot trading. Additionally, leverage is an option. An option to increase the potential gains or losses made via short term price swings in a particular futures contract. The amount of leverage available to traders on crypto exchanges used to be more than 100x. However, it has now dropped down to more reasonable levels that usually max out around 20x.
Lending Bitcoin to Crypto Futures Traders
It is also possible to earn yield by lending crypto assets like bitcoin to traders. This is still a relatively new aspect of the crypto market. Holders of bitcoin, stablecoins, and other crypto assets are able to lend their holdings to exchanges. Also to large traders, and even decentralized finance (DeFi) protocols to generate yield.
People are borrowing crypto assets for use in the futures market. Those are doing so in order to take advantage of arbitrage opportunities. Opportunities between futures contracts and the prices of their underlying assets. Those who will be lending their funds to DeFi protocols will be taking on very different risks. There are risks that are fundamental to the futures market.
The annual percentage yield for those lending to traders in the crypto futures market can be higher than 10%. There are many other ways to generate yield on exchanges, such as staking. This is something to keep in mind when looking for where to buy bitcoin.
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