What are futures?

While futures were originally reserved for traditional financial markets, the cryptocurrency industry has ended up adopting them as well. These are financial instruments that make it possible to anticipate variations in a digital asset on a specific date, whether upwards or downwards.

Futures are not intended for people who are new to cryptocurrencies because their operation is relatively complex. In the context of this article, however, we will try to make you understand how this financial instrument works in the most understandable way possible.

Differences between futures and spots

When a person goes to an exchange to buy a cryptocurrency, they usually exchange money, or another digital asset, to obtain this virtual currency. In this case, he owns the crypto and it belongs to him. This is called the spot.

Futures work differently. The future is what is called a forward contract, that is to say that it has a definite duration in time. On a fixed date, this contract expires and the two parties who have been bound by this instrument must buy or sell the underlying asset (the cryptocurrency) at the price agreed in the contract.

Throughout the term of validity of the future, it is possible to exchange it with other people, as you could do with a cryptoasset purchased using the spot method. However, when you buy a future, you must put up a security deposit, called margin, to guarantee that you will honor the terms of the contract when it expires.

What are the advantages and disadvantages of futures?

Futures are financial instruments that we absolutely do not recommend for beginners. The risk of making mistakes when procuring them is extremely high and this can lead to financial losses. We therefore advise you to know a minimum of how this financial instrument works.

The only advantage that we find in futures is to allow us to practice what is called “shorting”, that is to say betting on the fall in the price of a cryptocurrency. If you think the value of Bitcoin is much too high, then it is possible to take a future that speculates on the downside of it.

In terms of disadvantages, there are several negative points. First of all, it is a financial instrument that only works in the short term, because it has an expiry date. If you want to invest for the long term, it is preferable to use spot. There is the case of perpetual futures, but that is beyond the scope of this article and therefore we will not discuss it.

Then we can cite leverage. If this can be interesting in classic markets where volatility is low, this is not the case in the world of cryptocurrencies. Indeed, it has already happened that the latter sometimes lose or gain 40% in one day. Using 2.5X leverage, down or up, means your position would have gone to zero and you would have lost all your money.

Many sites sometimes do not hesitate to offer leverage effects of up to 100X. As much to tell you that with the volatility of the crypto markets, it is ruin assured by using a multiplier. We therefore advise never to touch the levers until you are an expert in the field of cryptocurrencies. As an idea, almost no crypto trader uses leverage as the volatility of these underlyings is high.

Conclusion on futures

Although we had to make some simplifications in order to make our explanations of futures easier to understand, we hope that you now have a better understanding of what these financial instruments are all about.

We prefer to repeat it again, but futures are reserved for advanced level crypto investors. If you don’t fully understand how futures work, you risk making many mistakes that will cost you a lot of money.

Back to glossary

Receive a digest of news in the world of cryptocurrencies by subscribing to our new daily and weekly newsletter service so you don’t miss any of the essential Cointribune!

User Image

Nicholas

I discovered the world of cryptocurrencies in January 2018. Arrived at the worst time to invest, I have never stopped training since then and now share my knowledge in order to facilitate the adoption of cryptos.

Leave a Reply

Your email address will not be published.