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 entering this fast growing market, traders should consider some key differences between crypto futures and traditional futures.
Different musical instruments
Traders entering traditional market cryptocurrencies will be accustomed to futures contracts with a fixed expiration date. Although fixed expiration contracts can be found in the cryptocurrency market, a large portion 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 traders can hold open positions indefinitely.
Exchanges that offer perpetual contracts use a mechanism called a “fund rate” to regularly balance the price difference between the contract market and the spot price. If the fund’s interest rate is positive, the price of the perpetual contract is higher than the spot interest rate long positions pay short positions. Conversely, negative finance rates mean shorts pay longs.
Additionally, traders moving from traditional finance to cryptocurrency can get used to the portability of their positions between different exchanges. In contrast, cryptocurrency exchanges generally operate in the form of a walled garden, which means that it is impossible to transfer derivative contracts across multiple platforms.
Regulated and unregulated trading platforms
Most cryptocurrency futures exchanges – around 85% to 90% – have not yet been regulated. This is mainly due to the rise of the cryptocurrency futures market, as regulators continue to work hard to resolve more fundamental issues regarding the legal status of digital assets. BitMEX paved the way for cryptocurrency futures trading using margin and collateral contracts. In doing so, the company avoids the regulatory requirements related to legal access ramps. There are currently a dozen major trading platforms, but only a few have achieved regulatory status.
These two Chicago Stock Exchange (CME) and cooked Overseen by the United States Commodity Futures Trading Commission (CFTC). In Europe, Kraken Futures Operates under a Multilateral Trade Facility license Published by the Financial Conduct Authority of the United Kingdom. In Switzerland, Vontobel and Leonteq Provide mini bitcoin futures Through the Six Swiss Exchange.
Regulatory conditions may prevent traders in certain countries from participating in transactions on unregulated platforms. This is especially true in the United States, where stock exchanges have noticed that the CFTC Chase BitMEX Now Violation of anti-money laundering regulations and bank secrecy laws.
However, the U.S.-regulated crypto futures platform has extended its tools beyond pure Bitcoin (Bitcoin) Futures contracts can meet growing demand. For example, CME recently Beyond Provide Bitcoin Futures and Options for Ether (Ethereum) Futures contracts. In addition, Bakkt also offers monthly Bitcoin futures and options.
Unregulated platforms offer futures and perpetual swaps for a wider range of altcoins, but only for traders in the countries / regions where they are licensed to operate. Either way, most of the liquidity is still concentrated in BTC and ETH futures, at least for now.
Different regulatory environments associated with the management of perpetual contracts have resulted in practical differences between crypto futures and traditional futures. As there is no central counterparty clearing system, the exchanges face a high degree of risk, especially since many exchanges offer high leverage of up to 125 times. Therefore, losing positions that reach the maintenance margin will be closed.
The exchange usually transfers the profits from the 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 factor. If there is no fund, or if the fund becomes too low to compensate for losses caused by the liquidation, profitable traders will bear the risk that their positions will be “automatically reduced” by the exchange.
Another important operational consideration is the downtime of the exchange. Many unregulated platforms The server crashes during periods of high volatility, resulting in traders unable to liquidate their positions before being liquidated. Therefore, it is worth studying the platform’s downtime history before opening an account.
Low barriers to entry
Barriers to entry into the cryptocurrency futures market are generally very low. Traders can open an account, go through the ‘know your customer’ process, deposit funds and start trading within minutes.
In contrast, entry barriers for exchange traded futures are high because the contract sizes involved are prepared for institutional traders. This situation is also reflected in regulated crypto futures products. The contract sizes of the two regulated crypto futures trading platforms, CME and Bakkt, are 5 BTC and 1 BTC respectively. Since the current price is over $ 31,000, these contracts are clearly only for those who want to make substantial investments.
However, the blockchain offers great potential to transform the futures market into a cryptocurrency through the tokenization of assets. Suppose the Nasdaq-100 or S&P 500 futures contracts are provided in token form. In this case, it can trade in partial increments, thereby reducing barriers to entry and introducing new sources of liquidity in traditional markets.
This situation may benefit those who wish to introduce more detailed diversification into their portfolios, which is currently only possible thanks to Contract for the difference (Contracts for the difference). Although they play a similar role in the financial markets, CFDs can only be obtained through brokers, which reduces the transparency of traders. It also diversifies the available liquidity of the broad market.
Despite rapid growth, the cryptocurrency futures market is still in its infancy, not least because the influx of cryptocurrencies by institutions is just beginning. As the market grows and develops, we may see the emergence of new and more complex tools, and the lines between traditional finance and digital finance will also become blurred. In addition, as funds flow in, the regulatory situation is expected to continue to evolve. One thing is certain: the future of cryptocurrency futures is long.
This article does not contain any investment advice or recommendations. Every action in investing and trading involves risk, and readers should research for themselves when making a decision.
The views, thoughts and opinions expressed herein are solely 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 at Swiss intelligence agencies and major banks. He was also 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.