Cryptocurrency futures trading is beneficial for investors as this financial activity aids them in raking in capital gains over time.
However, many of these risk-takers fail to pay attention to the common investing pitfalls, and this scenario can result in unwanted financial losses.
We aim to help our avid readers, especially those who are cryptocurrency futures investors, get the most from their trading and investing experiences.
We are posting this educational article on our portal because we believe it will greatly assist them in their investing journeys.
In the United States, trading cryptocurrency futures happens on virtual currency exchanges and the CME Group Incorporated, also known as the Chicago Mercantile Exchange, in Chicago, Illinois.
Cryptocurrency futures are contracts between two virtual currency investors who wager on a specific crypto-asset’s future trading price. They permit investors to gain exposure to select virtual currencies without buying them.
Additionally, cryptocurrency futures resemble stocks or standard futures contracts for commodities because they let traders wager on an underlying asset’s price trajectory.
Virtual currency traders utilize high leverage in cryptocurrency futures markets, per the educational article posted on cryptocurrency industry news source Cointelegraph.
They usually commit mistakes as they fail to familiarize themselves with the misconceptions about cryptocurrency futures trading, especially on derivatives exchanges based on the traditional finance realm’s exterior.
Cryptocurrency futures traders commonly miss the following two factors. They should always remember them to prevent considerable financial losses:
1. PRICING FACTOR
Investors often utilize cryptocurrency futures contracts and other derivatives to diminish investment risks. These risk-takers in the cryptocurrency derivatives contracts space usually overlook the differences in costs.
After all, it is common that most cryptocurrency trading services display US dollar-denominated quotes, although they do not utilize US dollars.
Another pitfall is that there is a lack of transparency which leads to investors becoming unaware if the contracts are priced in stablecoins.
Therefore, investors are exposed to more risks and distortions when analyzing and trading in the futures markets.
Experts recommend that cryptocurrency futures investors consider price disparities before employing leverage when venturing into the futures markets.
2. LIQUIDATION IMPACT
Liquidation affects derivatives instruments. They typically cause a decoupling between the regular spot exchanges and the derivatives contract.
A derivatives exchange features a built-in mechanism closing the position when an investor’s collateral is insufficient to cover the hazard.
This liquidation mechanism might result in a drastic trading price action and subsequent decoupling from the index price.
Investors who are unaware of these realities usually react to trading price fluctuations that only took place in the derivatives contract, even if these distortions will not trigger more liquidations.
Derivatives exchanges depend on external trading price sources, typically from regular spot markets, to compute the reference index price.
These procedures are one-of-a-kind, yet investors should consider their effects before employing leverage.
We suggest our readers who are cryptocurrency futures traders familiarize themselves well with the abovementioned factors. In this manner, their experience in the futures markets will be fruitful.