Many traders entering the cryptocurrency market from traditional finance may view derivatives as price speculation and hedging tools. There are many options in terms of exchanges and tools; however, before setting foot in this fast-growing market, traders should consider some key differences between crypto futures and traditional futures.
Different musical instruments
Traders entering cryptocurrencies from the traditional market will be accustomed to futures contracts with a fixed expiration date. Although fixed expiration contracts can be found in the cryptocurrency market, a large part of crypto futures transactions are perpetual contracts, also known as perpetual swap contracts. There is no fixed end date for this change in futures contracts, which means that traders can hold open positions indefinitely.
Exchanges that provide perpetual contracts use a mechanism called “fund rate” to regularly balance the price difference between the contract market and the spot price. If the fund interest rate is positive, the price of the perpetual contract is higher than the spot interest rate-long positions pay short positions. Conversely, negative funding rates mean that shorts pay longs.
In addition, traders who switch from traditional finance to cryptocurrency may become accustomed to the portability of their positions between different exchanges. In contrast, cryptocurrency exchanges usually operate in the form of a walled garden, which means that it is impossible to transfer derivative contracts across platforms.
Regulated and unregulated trading platforms
Most of the trading of cryptocurrency futures-about 85% to 90%-has not yet been regulated. This situation arises mainly because of the rise of the cryptocurrency futures market, while regulators are still working hard to resolve more basic issues regarding the legal status of digital assets. BitMEX paved the way for cryptocurrency futures trading by using coin margin and collateral contracts. By doing so, the company avoids regulatory requirements related to legal on-ramps. There are currently about a dozen major trading platforms, but only a few have reached regulatory status.
These two Chicago Mercantile Exchange (CME) and baked It is regulated by the US Commodity Futures Trading Commission (CFTC). In Europe, Kraken Futures Operates under a multilateral trading facility license Issued by the Financial Conduct Authority of the United Kingdom. In Switzerland, Vontobel and Leonteq Provide mini bitcoin futures contracts Through the Six Swiss Exchange.
Regulatory conditions may prevent traders in some countries from participating in transactions in unregulated venues. This is especially true in the United States, where the exchanges have noticed the CFTC Pursue BitMEX now Violation of anti-money laundering regulations and bank secrecy laws.
However, the U.S. regulated crypto futures platform has expanded its tools beyond pure Bitcoin (Bitcoin) Futures may be in response to increasing demand.For example, CME recently Beyond Provide Bitcoin futures and options for Ether (Ethereum) Futures. In addition, Bakkt also offers monthly Bitcoin futures and options.
Unregulated platforms offer futures contracts and perpetual swaps for a wider range of altcoins, but only for traders in countries/regions where they are allowed to operate. In any case, most of the liquidity is still concentrated in BTC and ETH futures, at least for now.
Different regulatory environments, coupled with the management of perpetual contracts, have resulted in some practical differences between encrypted futures and traditional futures. Since there is no central counterparty clearing system, exchanges face a high degree of risk, especially considering that many exchanges provide high leverage of up to 125 times. Therefore, losing positions that reach the maintenance margin will be closed.
The exchange usually transfers any profits from liquidation to an insurance fund. When the counterparty does not have enough margin to pay for the transaction, the insurance fund exists to protect the profit of the trader. When using unregulated exchanges, the existence and relative health of insurance funds is a key consideration. If there is no fund, or if the fund becomes too low to make up for the losses caused by the liquidation, profitable traders will bear the risk of their positions being “automatically reduced” by the exchange.
Another important operational consideration is exchange downtime.Many unregulated platforms Server crashes during periods of high volatility, Resulting in traders unable to liquidate their positions before being liquidated. Therefore, it is worth studying the downtime history of the platform before opening an account.
Low barriers to entry
The barriers to entry for the cryptocurrency futures market are usually very low. Traders can open an account, go through the “know your customer” process, deposit funds, and start trading within a few minutes.
In contrast, the barriers to entry for exchange-traded futures are high because the contract sizes involved are prepared for institutional traders. This situation is also reflected in regulated encrypted futures products. The contract sizes of the two regulated crypto futures trading venues, CME and Bakkt, are 5 BTC and 1 BTC, respectively. Since the current price is more than $31,000, these contracts are clearly only for those willing to make substantial investments.
However, blockchain offers great potential to transform the futures market into a cryptocurrency through asset tokenization. Assume that Nasdaq-100 or S&P 500 futures contracts are provided as tokens. In this case, it can trade in partial increments, thereby reducing entry barriers and introducing new sources of liquidity into traditional markets.
This situation may benefit those who wish to introduce more fine-grained diversification into their portfolios, which is currently only possible through Contract for difference (Contracts for Difference). Although they play a similar role in financial markets, CFDs can only be obtained through brokers, which reduces the transparency of traders. It also diversifies the available liquidity of the wider market.
Despite rapid growth, the cryptocurrency futures market is still in its infancy, especially because the influx of cryptocurrencies by institutions has just begun. As the market grows and develops, we may see the emergence of new and more complex tools, and the boundaries between traditional finance and digital finance will also become blurred. In addition, as more funds flow in, the regulatory situation seems likely to continue to evolve. One thing is certain: the future of cryptocurrency futures is long.
This article does not contain investment advice or recommendations. Every investment and trading action involves risks, and readers should research on their own when making a decision.
The views, thoughts, and opinions expressed here are only those of the author, and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Andy Fry Is a serial entrepreneur and quantitative trading expert. Andy is a former Swiss Air Force pilot who has led projects in Swiss intelligence agencies and major banks. He also served as a senior project manager and software architect at Siemens Switzerland AG. In 2010, Andy became a partner and head of algorithmic trading at the Swiss quantitative hedge fund Linard Capital AG. Andy holds a master’s degree in industrial management and manufacturing engineering from ETH Zurich and an EMBA degree from the University of St. Gallen.