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Basic of Crypto Futures Trading
Decentralized Futures on Kwenta allow traders to get exposure to a market without actually owning the underlying synth. Futures are accessible on a derivatives trading platform like Kwenta futures. Crypto trades 24/7, and so are futures.
Futures traders should familiarize themselves with some essential concepts noted below. These concepts are critical to understanding the power of leverage. Critical points outlined below are essential when dealing with futures and require traders to know how they affect each trade.
Leverage:
Leverage is the most common reason traders are attracted to futures and is a capital multiplier. Trading with leverage allows for more advanced trading methods.
To buy 1 Ethereum on a spot market, you'd need a few thousand dollars (at the time of writing). With leverage, you can open the same eth position with a fraction of the required spot market capital. The higher the leverage a trader uses, the less capital is needed to open the intended position. Leverage is only available when trading futures. An initial margin is needed to enter into a futures position. Initial margin is the percentage of a futures position notional value that must be covered by cash or collateral.
Margin Requirements
Maintenance margin is the minimum amount that traders need in their margin account to keep their position(s) open. When a trader's margin balance becomes equal to their maintenance margin their position gets liquidated. Liquidations Futures traders can be forced to exit positions when their losses bring their margin balance equal to their maintenance margin requirements. When this happens involuntarily and automatically losing trades are liquidated.
Skew funding rate
As the SNX debt pool is the counterparty to every position, we require a mechanism to incentivize the market skew to remain balanced (equal long/short open interest). Funding in our case was designed to incentivize a balance of open interest on each side of the market. Positions on the crowded side of the market will be charged funding, while positions on the noncrowded side will receive funding. Funding rates can have unfavorable effects on a traders position. For instance, funding rates may surge when the market is consistently moving in the same direction, making it costly for traders to hold long positions.
Ups & Downs of Trading Futures
Trading Futures comes with many advantages but also has significant risks.
Pros
- Trading futures allows one to profit from both rise in asset value and its fall.
- Futures allow for the use of leverage. This is the most sought-after advantage as traders can execute orders at a lower cost compared to the matching spot market.
- It allows for advanced trading methods.
Cons
- The high volatility in the crypto space can be a blessing or an agony. Market movement is something no one can guarantee. Due to the leverage involved, futures is one of the most challenging trading tools. Traders, in turn, should trade them with a strong risk management strategy.
- Futures allow a trader to speculate on asset prices. Becoming familiar with the basics of futures is a must. Futures trading can be lucrative if you apply risk management to avoid nonproportional losses.
In short, you should strategize and do your research before trading futures and understand both their advantages as well as their risks. Trading Futures can result in significant financial loss, keep in mind at all times:
Never invest more than you can afford to lose!
Last modified 3mo ago