When it comes to trading cryptocurrency futures, various investors frequently reveal rather significant false beliefs, particularly on secondary exchanges outside the standard financial world.
Let’s look at common mistakes that can be made when trading cryptocurrency futures and some common misconceptions that investors need to be aware of.
Biggest Mistakes To Avoid When Trading Cryptocurrency Futures
1. Sometimes Discounted Futures Surprise
The divergence results from the anticipation of a fork consolidation that might occur during the consolidation of Ethereum. The buyer of the derivatives contract will not receive any of the free coins holders of Ether may obtain in the future.
However, this is not the only reason for a decoupling because each exchange has its pricing mechanism and risks. Airdrops can also cause discounted futures prices because the holders of a derivatives contract will not receive the award.
For instance, the price of Polkadot quarterly futures on Binance and OKX has been trading at a discount compared to the price of Polkadot (DOT) on spot exchanges.
Note that the futures contract trades at a discount of 1.5% to 4% between May and August. This lag can be attributed to a lack of demand from buyers using leverage.
However, considering the longer-term trend and the fact that Polkadot has shown a 40% increase between July 26 and August 12, it is likely that external factors are at play.
Since the prices of futures contracts are determined independently from those of spot exchanges, traders will need to adjust their targets and entry levels when using quarterly markets.
2. Consider Higher Fees and Value Decoupling
The leverage, or the capacity to trade quantities bigger than the initial deposit, is the primary advantage of futures contracts (security or margin).
Consider the following example: An investor makes a deposit of $100 and uses 20 times leverage to purchase $2,000 worth of Bitcoin (BTC) futures contracts.
A transaction involving $2,000 is subject to a default fee of 0.05%, even though the trading fee for derivative contracts is often lower than that for positional indexes.
As a result, the cost of entering and leaving the position once will be four dollars, equivalent to 4% of the initial investment. Although it might not seem like much, costs such as this can add up quickly as a company expands.
Traders may know the additional costs and benefits of employing a futures instrument; nonetheless, an unknown factor is more likely to emerge when volatile market circumstances arise.
Liquidations are typically the culprit for causing a decoupling between the derivatives contract and the ordinary spot markets.
The derivatives exchange is equipped with a mechanism that terminates a trader’s position once the trader’s collateral is deemed insufficient to cover the risk.
This liquidation process can potentially create substantial price activity, which may ultimately make the index less valuable than the price.
Uninformed investors may respond to price swings that only occur in derivative contracts, despite the fact that these distortions will not lead to additional liquidation. It should be noted that calculating the benchmark price on derivatives exchanges is dependent on external pricing sources, which often come from conventional spot markets.
There is nothing inherently wrong with these one-of-a-kind operations, but before utilising leverage, all traders should carefully analyse their implications. When trading in the futures markets, it is important to consider price separations, increased costs, and the effect of liquidation.
3. Pricing and Trading Derivatives Varies From Spot Trading
At the moment, the total open interest in futures contracts on the cryptocurrency market is greater than $25 billion, and seasoned retail traders and fund managers are utilising these tools to leverage their crypto positions.
Futures Despite the widespread understanding, the true intent of other derivatives is not for them to be utilised in a way that demeans gambling; rather, they are frequently employed to minimise risk or enhance exposure.
Contracts for crypto derivatives sometimes fail to consider all relevant changes in pricing and trade. When entering the futures market, traders should at the very least consider these distinctions for the reasons stated above.
Even futures investors experienced in traditional assets can make blunders, so it is essential to have a solid understanding of the current specifications before utilising leverage.
Despite displaying US dollar prices, most cryptocurrency trading platforms do not deal in USD. When trading on and evaluating the futures markets, this leads to additional risk and distortions, and it is a huge mystery that has not been revealed to the public. It is also one of the hazards that derivatives traders must avoid.
The lack of transparency is the most serious problem, which means that customers aren’t truly aware of whether or not the contracts are priced in stablecoins. However, considering there is always the possibility of arbitrage when using centralised exchanges, this should not be a significant cause for concern.
Learn more: EARNING WITH CRYPTO ARBITRAGE: A COMPLETE GUIDE
The most important advantage of futures contracts is the ability to profit from or take advantage of the possibility to trade amounts that are greater than the original down payment (security or margin).
Investors are aware of the additional costs and benefits of using a futures device, yet, an unknown factor has a propensity to only be felt during unpredictable market conditions.
When trading in the futures markets, it is important to keep an eye out for things like cost decoupling, increased fees, and the effects of bargaining.