So, you want to invest in the crypto market, but you don’t want to buy and sell cryptocurrencies. Well, you can accomplish this through trading crypto perpetual futures. But what are crypto perpetual futures?
They are derivatives that allow traders to speculate on the future price of cryptocurrencies without actually owning the coins. However, they operate differently compared to traditional futures contracts.
What Are Crypto Perpetual Futures?
As mentioned, crypto perpetual futures are a type of derivative that allows you to speculate on the price movements of cryptocurrencies without owning the underlying assets. So, for example, you can open a position speculating whether the Bitcoin price will rise or fall, without owning even $100 worth of Bitcoin.
One thing that makes crypto perpetual futures more attractive than traditional futures contracts is the lack of a fixed expiration date. Without expiry, you can maintain positions indefinitely as long as you meet the exchange’s margin requirements.
Key Concepts Every Trader Should Understand
Before you start trading crypto perpetual futures, here are some of the key concepts you should master.
§ Leverage: Increases Market Exposure
Leverage is one of the main things that attracts many traders to crypto perpetual futures. It allows you to control a larger position using a small amount of capital. For instance, if the exchange platform offers 10x leverage, you can open a $100 trade using $10.
However, you must be careful when using leverage as it magnifies losses just as it does profits. You can always use flpp.io to determine whether the risk is worth it before opening a leveraged position.
§ Margin
Margin refers to the capital you need in your trading account to open a leveraged position in the market. In crypto perpetual futures, you will encounter two main types of margin: initial and maintenance.
Initial margin is what you need before opening a position. Once your trade is active, maintenance margin is the balance needed to keep a position open.
§ Long and Short Positions
When you start trading crypto perpetual futures, you will hear other traders talking about going long and short. Now, crypto perpetual futures allow traders to profit from both rising and falling markets through long and short positions.
If you expect the price of, say, Bitcoin to rise, you go long or open a long position. If the price of Bitcoin rises, you can close the position at a profit. Going short, on the other hand, refers to a position you open if you expect the price to fall.
§ Liquidation: Understanding the Biggest Risk
Liquidation is one of the biggest risks associated with using leverage when trading crypto perpetual futures. It occurs when your maintenance margin is no longer sufficient to support an open leveraged position.
When this happens, the exchange automatically closes the position to prevent the account from falling into a negative balance. You can steer clear of liquidation by using lower leverage and setting stop-loss levels in your trades.
§ Trading Fees and Other Costs
Your goal is to make a profit, and to do so you must understand the costs associated with crypto perpetual futures trading. Most exchanges charge a fee when you open and close positions. In addition, you will incur spread and slippage, which often vary depending on liquidity and volatility.
