Many merchants regularly share some comparatively huge misconceptions about cryptocurrency futures trading, particularly on derivatives exchanges outdoors of the realm of conventional finance. The commonest errors relate to futures market value decoupling, charges and the affect of liquidations on the spinoff instrument.
Let’s discover three easy errors and misconceptions merchants ought to keep away from when trading crypto futures.
By-product contracts differ from spot trading in pricing and trading
At present, combination futures open curiosity within the crypto market exceeds $25 billion, and retailers and veteran fund managers are utilizing these instruments to leverage their crypto positions.
Futures contracts and different derivatives are sometimes used to cut back danger or enhance publicity and, regardless of this in style interpretation, are usually not actually supposed for degenerate playing.
Some variations in pricing and trading are sometimes ignored in crypto spinoff contracts. Because of this, merchants ought to a minimum of take into account these variations when venturing into the futures markets. Even savvy derivatives buyers from conventional investments make errors, so it is essential to know the ins and outs earlier than utilizing leverage.
Most crypto trading providers don’t use US {dollars} even once they show USD quotes. It is a nice untold secret and one of many pitfalls confronted by derivatives merchants, which introduces further dangers and distortions to trading and analyzing futures markets.
The urgent drawback is the shortage of transparency, so prospects do not actually know if the contracts are priced in stablecoin. Nevertheless, this should not be an enormous drawback contemplating there’s all the time a danger of an middleman when utilizing centralized exchanges.
Discounted futures typically convey surprises
As of Sept. 9, Ether (ETH) futures expiring Dec. 30 are trading for $22, or 1.3% under the present value, on spot exchanges similar to Coinbase and Kraken. The distinction comes from the anticipation of merge fork cash that would emerge through the Ethereum merge. Consumers of the derivatives contract won’t obtain any of the possibly free cash that Ether holders might obtain.
Airdrops may also lead to lowered futures costs as derivatives contract holders do not win, however that is not the one case behind decoupling, as every trade has its personal pricing mechanism and dangers. For instance, Polkadot quarterly futures on Binance and OKX have been trading at a reduction to the DOT value on spot exchanges.
Binance Polkadot (DOT) quarterly futures premium. Supply: TradingView
Discover how the futures contract traded at a reduction of 1.5% to 4% between Might and August. This backwardation exhibits an absence of demand from leveraged consumers. Nevertheless, given the long-term pattern and the truth that Polkadot is up 40% from July 26 to August 12, exterior elements are seemingly at play.
The futures contract value has decoupled from spot exchanges, requiring merchants to regulate their targets and entry ranges when utilizing quarterly markets.
Greater charges and value decoupling must be thought-about
The primary good thing about futures contracts is leverage, or the flexibility to commerce quantities bigger than the preliminary deposit (collateral or margin).
Take into account a state of affairs the place an investor has deposited $100 and buys $2,000 price of (lengthy) Bitcoin (BTC) futures with 20x leverage.
Though trading charges for spinoff contracts are sometimes decrease than for spot markers, a hypothetical payment of 0.05% applies to $2,000 trades. Due to this fact, getting into and exiting the place as soon as prices $4, which is 4% of the preliminary deposit. That may not sound like quite a bit, however such a toll weighs as gross sales enhance.
Even when merchants perceive the extra prices and advantages of utilizing a futures instrument, an unknown factor tends to point out up solely in unstable market circumstances. A decoupling between the spinoff contract and the common spot exchanges is often attributable to liquidations.
When a dealer’s collateral is now not adequate to cowl the danger, the derivatives trade has a built-in mechanism that closes the place. This liquidation mechanism may result in drastic value actions and a ensuing decoupling from the index value.
Though these distortions don’t set off additional liquidations, uninformed buyers may react to cost fluctuations that solely occurred within the spinoff contract. To be clear, derivatives exchanges depend on exterior value sources, sometimes common spot markets, to calculate the benchmark index value.
There’s nothing fallacious with these distinctive processes, however all merchants ought to take into account their implications earlier than utilizing leverage. Value decoupling, higher charges and liquidation implications must be analyzed when trading in futures markets.
The views and opinions expressed herein are solely these of the writer and don’t essentially replicate the views of Cointelegraph. Each funding and trading motion entails danger. You need to do your personal analysis when making a call.