3 major mistakes to avoid when trading cryptocurrency futures markets

Many merchants often specific some comparatively massive misconceptions about buying and selling cryptocurrency futures, particularly on derivatives exchanges exterior the realm of conventional finance. The most typical errors contain futures markets’ value decoupling, charges and the affect of liquidations on the derivatives instrument.

Let’s discover three easy errors and misconceptions that merchants ought to keep away from when buying and selling crypto futures.

Derivatives contracts differ from spot buying and selling in pricing and buying and selling

At present, the combination futures open curiosity within the crypto market surpasses $25 billion and retail merchants and skilled fund managers use these devices to leverage their crypto positons.

Futures contracts and different derivatives are sometimes used to cut back danger or enhance publicity and will not be actually meant for use for degenerate playing, regardless of this frequent interpretation.

Some variations in pricing and buying and selling are normally missed in crypto derivatives contracts. For that reason, merchants ought to not less than contemplate these variations when venturing into futures markets. Even well-versed derivatives traders from conventional belongings are susceptible to creating errors, so it’s necessary to know the present peculiarities earlier than utilizing leverage.

Most crypto buying and selling companies don’t use U.S. {dollars}, even when they show USD quotes. It is a huge untold secret and one of many pitfalls that derivatives merchants face that causes further dangers and distortions when buying and selling and analyzing futures markets.

The urgent situation is the shortage of transparency, so purchasers don’t actually know if the contracts are priced in stablecoin. Nevertheless, this shouldn’t be a significant concern, contemplating there’s at all times the middleman danger when utilizing centralized exchanges.

Discounted futures typically include surprises

On Sept. 9, Ether (ETH) futures that mature on Dec. 30 are buying and selling for $22 or 1.3% under the present value at spot exchanges like Coinbase and Kraken. The distinction emerges from the expectation of merge fork cash that might come up through the Ethereum merge. Patrons of the derivatives contract won’t be awarded any of the doubtless free cash that Ether holders could obtain.

Airdrops can even trigger discounted futures costs for the reason that holders of a derivatives contract won’t obtain the award, however that’s not the one case behind a decoupling since every trade has its personal pricing mechanism and dangers. For instance, Polkadot quarterly futures on Binance and OKX have been buying and selling at a reduction versus DOT value on spot exchanges.

Discover how the futures contract traded at a 1.5% to 4% low cost between Might and August. This backwardation demonstrates an absence of demand from leverage consumers. Nevertheless, contemplating the long-lasting development and the truth that Polkadot rallied 40% from July 26 to Aug. 12, exterior elements are probably in play.

The futures contract value has decoupled from spot exchanges, so merchants should alter their targets and entry ranges at any time when utilizing quarterly markets.

Increased charges and value decoupling must be thought of

The core good thing about futures contracts is leverage, or the power to commerce quantities which are bigger than the preliminary deposit (collateral or margin).

Let’s contemplate a state of affairs the place an investor deposited $100 and buys (lengthy) $2,000 USD value of Bitcoin (BTC) futures utilizing 20x leverage.

Regardless that the buying and selling charges on derivatives contracts are normally smaller than spot markers, a hypothetical 0.05% payment applies to the $2,000 commerce. Subsequently, coming into and exiting the place a single time will price $4, which is equal to 4% of the preliminary deposit. Which may not sound a lot, however such a toll weighs because the turnover will increase.

Even when merchants perceive the extra prices and advantages of utilizing a futures instrument, an unknown factor tends to current itself solely in unstable market circumstances. A decoupling between the derivatives contract and the common spot exchanges is normally attributable to liquidations.

When a dealer’s collateral turns into inadequate to cowl the chance, the derivatives trade has a built-in mechanism that closes the place. This liquidation mechanism would possibly trigger drastic value motion and consequent decoupling from the index value.

Though these distortions won’t set off additional liquidations, uninformed traders would possibly react to cost fluctuations that solely occurred within the derivatives contract. To be clear, the derivatives exchanges depend on exterior pricing sources, normally from common spot markets, to calculate the reference index value.

There may be nothing flawed with these distinctive processes, however all merchants ought to contemplate their affect earlier than utilizing leverage. Worth decoupling, increased charges and liquidation affect must be analyzed when buying and selling in futures markets.

The views and opinions expressed listed here are solely these of the author and don’t essentially mirror the views of Cointelegraph. Each funding and buying and selling transfer includes danger. It’s best to conduct your individual analysis when making a call.