How to Buy Futures in the Crypto Space
The current futures market is looking very bright indeed both inside cryptocurrency and out. The futures industry, in general, is growing at lightning pace, climbing by over 20 percent in 2018 from the previous year. When it comes to cryptocurrency derivatives, they’re gaining in popularity as well with records being set this year left, right, and center.
BitMEX, for example, hit an all-time high for crypto futures trading in June at over $16 billion in just 24 hours while CME had two record months in a row this May and June. New players are entering this growing space all the time and Digitex is priming up to grab our slice of the current futures market as well!
So, with all this action going on, you may be asking yourself how to buy futures--and whether you should. If you're looking for a "Trading futures for dummies"-style crash course, let's take a look at what futures are and if they’re a smart choice for you.
How to Buy Futures
Let’s backtrack just a moment to be sure we’re on the same page. In case you don’t have all the answers right now, you may also be wondering what futures actually are. Allow us to explain.
When you open a futures trading account and start to place buy and sell orders, you’re not actually buying or selling the financial instrument underneath but a contract that allows you to buy the asset on a future date at a specified price. Unlike spot trading on Binance or Kraken for example, you aren’t actually buying the crypto coin, but entering into a futures contract.
Physically Settled vs Cash-settled Futures Contracts
These futures contracts are either physically settled or cash-settled. This means that you can speculate on the dollar price of Bitcoin, Ethereum, or your chosen crypto market, enter a BTC/US dollar futures contract and your payout will be in either of the aforementioned forms.
Thus far, in the current futures market for crypto, there are no physically settled contracts. All profits and losses are made in cash, which means there is no physical delivery of the underlying instrument.
The long-awaited Bakkt will be a game-changer when it enters the market as the first institution to launch physically settled Bitcoin futures contracts. All profits and losses will be denominated in BTC for the first time.
According to Investopedia, cash-settled contracts are one of the biggest reasons for the entry of speculators to the market. Big business and industry may, for example, want to receive their payout in barrels of oil or sacks of grain, but speculators who make the markets more liquid only want to profit on price movements.
On the Digitex exchange, our contracts will be cash-settled, in that they will not be settled in units of the underlying financial instrument. However, your futures trading account will be denominated in DGTX, as this is the only currency traders can use on the exchange.
Going Long or Short
Entering the futures trading market involves a fair bit of risk since, unlike traditional stocks and bonds, you’re having to make an educated guess as to whether the price will go up or down and take your short or long position.
Going short means that you believe the price of the asset, say Bitcoin, will go down by the specified date on the contract. Going long means that you believe it will go up. If you make the right call, you profit.
If the volatile markets don’t go your way, you lose; and may even end up having your position liquidated by the exchange. You should always put in some research and try learning from existing futures traders about how to buy futures before you start.
Setting Up a Futures Trading Account
In the cryptocurrency space, in the current futures market, if you want to day trade futures online, your options are still limited to fee-charging exchanges. There are more players entering the scene and even Binance will begin rolling out the testing of their derivatives product this month, but they all follow this same model.
Each exchange varies when it comes to the contracts you can buy and the futures trading market types available. So, you’ll probably need to try out a couple to see which one suits you best until our exchange goes live and obliterates the competition!
They all have their pros and cons and it comes down to personal taste. The UX on BitMEX is horrendous, for example. The exchange trades against its own customers, orchestrates flash crashes in the market, and is widely criticized for manipulating the market.
If you want to get your feet wet, so to speak, before entering crypto derivatives, you could also try setting up a virtual trading account first with an online broker. This is an account that lets you practice your skills trading futures with fake money. So, you’re not actually winning or losing, but gaining knowledge to understand the futures market.
If you’re ready to enter the current futures market in the crypto space, decide how much leverage (if any) you want to use, which futures trading market(s) you want to pursue, what the fee structure looks like (remember, there will be ZERO fees on our exchange as soon as we launch).
You’ll already know by now that many people in the cryptocurrency space are vehemently against KYC. After all, it’s the very antithesis of Bitcoin, privacy, and peer-to-peer payments. It’s also expensive and regulators rarely have cryptocurrency companies’ interests at heart. However, as BitMEX is demonstrating right now (and many an exchange before it), if you want to do business in the cryptocurrency industry as an exchange, sooner or later, you’ll need to implement KYC.
Know Your Customer involves varying degrees of checks depending on the exchange. You can find out about Digitex Futures KYC processes in detail here. But to open a futures trading account on any exchange, you’ll need to give over some personal information and upload a government-approved ID. You’ll then have to wait for it to be verified. This can take between a few minutes and a few days depending on the exchange.
How to Buy Futures Contracts
Currently, the mechanics of buying and selling futures contracts depends on the exchange that you’re trading on, but they all have the same fundamental elements in common. You’ll need to decide upon your sentiment first--will the price of Bitcoin rise or fall? If you think it will go up, by how much and when? If you think it will go down, set the date and the price.
Decide how much you’re willing to invest and put behind your convictions. If you want the chance to make greater profits without having to put down your own funds, you can try your hand at margin trading. This is where you enter into a Bitcoin dollar futures contract for a much higher amount than you have by using leverage to amplify your position.
Margin trading can result in up to 100 times the gains than trading without it. However, it is no joke and you can easily magnify your losses as well, ending up in a liquidated position.
How to Buy Futures on the Digitex Exchange
Once our exchange launches, we’ll be putting out plenty of educational material and step by step guides on how to buy futures. Our exchange will be dramatically different from the rest for various reasons.
Not only will we charge no commissions on trades and no commissions for any transactions on the exchange, but we’ll also allow users to buy and sell futures using a one-click trading ladder interface.
The Digitex user interface will appeal to many traders, especially the very high-frequency style of traders (scalpers) who aim to make profits from even the smallest of price movements and buy and sell many futures contracts in any given day.
The ladder allows them to see the prices going up and down on the left and right of it. This means that the trader can really stay in the zone without distractions, and place an order for a BTC against the dollar futures contract in one mouse click.
In highly volatile markets like cryptocurrency, time is of the essence. Even the extra steps to place an order using your keyboard can cause you to miss out.
Since we have no commission fees, this type of highly active scalp trading will finally be possible and will allow disciplined traders to actually make a living for the first time.
Wrapping It Up
While some traditional futures markets still shut up shop overnight, crypto futures never sleep. They give retail traders a chance like never before to get in on the trading game and achieve financial freedom and independence. But they also come with higher volatility and risk than traditional futures.
Since you can’t stay awake 24 hours a day every day checking the prices, you’ll need to ensure that you set up stop and limit orders so that you don’t get your position wiped out while you were sleeping.
You’ll also need to gauge how much leverage you’re willing to handle and what style of futures trader you are. We can’t wait to have you on our exchange and are working to bring it to you as soon as possible. Keep checking the blog for new updates!