Futures trading is popular in the cryptocurrency market because such transactions allow a trader to earn income regardless of the direction of price movement. At the same time, futures can become an effective way to hedge investments during periods of market decline.
Despite the fact that working with derivatives brings high profits, especially when using borrowed funds, losses in some cases may be greater than the initial investment.
Experts of RBC-Crypto told what risks you can face when trading futures and how you can use them to protect your investment portfolio.
Futures is a contract in which it is indicated which asset and for what period, at what price it is purchased. According to the head of the analytical department of AMarkets Artem Deev, the investor does not buy the asset itself, but the intention to purchase it at a certain price or sell it at a designated value.
The analyst clarified that as soon as the futures period ends, the buyer fulfills the contract by buying or selling the asset at the previously indicated price. At the same time, the value of the futures asset may differ greatly from the current market price.
“If bitcoin is planned to be sold for $ 20 thousand, then after a while it will be sold at this price under this agreement, even if the asset drops in value by that time or vice versa,” Deev gave an example.
A futures contract does not fix the current price, but a prospective one. The investor, based on his strategy and forecasts, goes to buy such a futures in order to hedge the risks of a fall in the value of the asset, the expert added.
Cryptocurrency derivatives (futures and options) are an indispensable tool for hedging the portfolio part of investments in the CFA market during periods of price declines, according to Viktor Pershikov, a leading analyst at 8848 Invest. According to him, the sale of futures on BTC and ETH, as well as the purchase of PUT options are necessary elements for successful cryptocurrency trading.
Pershikov noted that it is worth distinguishing between trading in cryptocurrencies and hedging. The analyst explained that in the first case, the goal is to earn money on the exchange rate difference of assets, whereas in the second case, the investor should strive not to make money on the sale, but to compensate for the sagging of assets in the portfolio due to profits from short positions on derivatives.
Usually, large players, funds and even exchangers resort to hedging, says Andrey Podolyan, CEO of Cryptorg. He gave an example of a company that has bitcoin intended for sale in a few days.
“How to protect yourself from a possible drawdown of the exchange rate? This is where hedging on futures will help a lot. You can open a short position on BTC. Thus, if the rate goes down, the hedger will earn the lost value of the cryptocurrency on futures and will buy the necessary piece of bitcoin for this profit,” the expert said.
The main advantage of the futures market is the opportunity to earn both long and short, unlike the spot market, where only asset growth is important for traders, Podolyan noted. That is why the futures market attracts more and more traders, the analyst believes.
“Futures traders use the same range of strategies as in standard financial markets. There are both long—term and short-term strategies, scalping, intraday and active bot trading,” Podolyan listed.
The leading analyst of 8848 Invest, Viktor Pershikov, identified three approaches from the point of view of futures trading strategies: day trading (intraday trading, one of the most difficult types of trading), swing trading (when transactions last 2-5 days in order to maximize profits from directional movement), and medium-term trading (most often, on perpetual futures).
The choice of approach depends on the skills and abilities of the trader, but it should be taken into account that the more frequent and small transactions a trader makes (especially with a poor p/l ratio in trades), the lower the probability of his success over a long distance, the expert admitted.
“For futures trading, trends and the strength of price changes do not play a big role: futures can be bought and sold, earning on the price difference, and even in a calm market, without a strong trend. With the help of futures, you can make money if you use moderate leverage,” Pershikov concluded.
Cryptocurrency futures are used for speculative purposes (in short-term trading), using leverage (with funds provided by exchanges), as well as for hedging risks, said Artem Deev, head of the analytical department of AMarkets. According to him, the first two options are still quite risky — in short-term trading, the fluctuation in the value of the asset matters, with the use of leverage, you can both gain a lot and lose.
The expert is confident that futures contracts provide an opportunity to diversify the portfolio, pursue a more flexible trading strategy and hedge risks. But with the use of leverage, the risks increase significantly, since borrowed funds can help to acquire large volumes of assets, but also lose significantly in the event of a sharp change in the situation on the markets, Deev explained.
Viktor Pershikov, a leading analyst at 8848 Invest, agreed with him. He clarified that as part of his work, he does not use futures with a leverage higher than 1 to 3: in a highly volatile market, a high level of leverage leads to large losses, and in pursuit of high profits from operations, retail investors and traders, most often, lose money in one or two unsuccessful transactions.