When it comes to trading terms, there can be some confusion because trading is basically buying and selling. However, due to the slight differences between each type and the way different assets behave, these confusions are well-founded.
But how can Crypto Futures Trading be so different from Crypto Coins Trading?
At the end of the day, it all boils down to make money buying and selling assets. But, if you want to take advantage of each and improve your trades as much as possible it is very important to know the differences.
To better illustrate the differences between each, it is necessary that we take a look at some of the definitions:
Crypto Coin Trading
This can be considered as the most basic form of trading. Let’s say you already have an account in an exchange and want to start trading Bitcoins. You simply need to purchase some Bitcoins, and then start trading. You’ll then profit according to your plans and the market behavior.
Imagine you want to trade Bitcoin Futures instead. The main difference here is that you don’t actually trade Bitcoins. In fact, you don’t even need to own a single crypto.
What you would actually be trading is the Contract itself, which also has some benefits on its own.
So, the simplest way to look at it is that you can either trade a Bitcoin or a Bitcoin Futures Contract.
How To Trade Futures?
The most important thing to keep in mind here is that a Future is basically a contract in which two parties agree upon a set price and date for a transaction to occur. Entering a contract as a buyer means that when the contract expires you’ll pay what you agreed upon and will receive what the contract states.
You enter a contract as a buyer in which you agree to pay, 6 months from now for 1 Bitcoin at $1,000. So, when the contract expires you’ll get your Bitcoin at that price (no matter if the current market value is $10,000)
It is very simple and you can benefit a lot, especially from highly volatile markets. However, the benefits don’t stop there – Although these contracts do a great job at reducing risks they also serve as a tool for day traders.
It might sound counterintuitive that a Day Trader can operate with a contract that will be settled in the future, but that’s what makes it so attractive.
The reason why you don’t need to purchase crypto is because you’re not trading that, you’re trading the contract. That’ll be your asset, and the benefit that day traders can perceive is that the contract has an already set price (which translates into less volatility).
Pros and Cons of Each
- Low commissions and some tax advantages. This makes them exceptionally good for day traders.
- There are storage issues because no actual crypto is needed. This means that you don’t need to know how to purchase Bitcoin, you don’t need to know how to set up a wallet and ultimately you don’t need to worry about getting you wallets hacked.
- Accounts are insured. Bitcoins might be unregulated (which is a big turn off for some people) but futures are regulated by the Commodity Futures Trading Commission.
- Some advanced techniques like placing bracket orders can even further reduce the risk of trading when the environment is highly volatile. This can also help you keep more control over your expected profit and losses.
- Spread trading and hedging opportunities are possible (ex.: short June futures, long September futures, etc)
- You can’t trade fractional contract sizes as you would trade a fraction of a coin.
- Compared to the coin market, bitcoin futures is a relatively low-volume market. As such, its price can be more vulnerable to fluctuations when big traders make a move.
- There are some limitations regarding the trading times. From Friday afternoon to Sunday afternoon Bitcoin Futures don’t trade, as opposed to the coins which trade 24/7. This halt can lead to some huge price gaps on your charts.
- Although futures can open some room for speculations, bitcoin futures might not be appropriate for that due to its immaturity and how hard it is to actually predict the market.
- You can buy and sell Bitcoin in fractions as opposed to futures. To start trading you may need to actually invest less money.
- Crypto trades 24/7, every day of the year. You can perform your operations any day of the week without a problem, and that you won’t suffer from the gaps that occur after a halt.
- The variety of orders you have available for coin trading is broader than those available for futures. There are limits, stop-loss, take profit, settle position, and other combined orders.
- If you deeply understand the market there’s more chance of taking advantage of price fluctuations than you would have with futures.
- Commissions are much higher than those of Bitcoin Futures Trading. This can make day trading harder and even unprofitable.
- Owning actual crypto means that there is the risk of losing it, whether by a hack or by not taking proper care of your wallet (losing the key, sharing the key, using hot wallets, etc.)
- You get no tax advantages when trading coins.
- Coin prices are especially vulnerable to spikes and fluctuations due to big moves. This is especially true in low-volume markets.
Futures Trading has overall more pros than Coin Trading. This doesn’t make it the perfect choice for every trader but it can definitely benefit day traders due to better risk management and lower commissions.
Whether you plan to include futures into your operations or you’re just feeling curious about it, rest assured that this is a great way of making more profit in the crypto market.