What are Futures?
Discover what crypto Futures are in acquiring better deals on your assets.
Futures are not native to crypto and have been used widely in traditional finance for decades. Futures are essentially purchasing a contract, usually while also borrowing money from the broker, to purchase or sell an asset at a later date.
The way it generally works is you purchase contracts for a certain amount of an asset, say bitcoin, with a certain amount of leverage. The more leverage you have, the riskier the contract. If you purchase a contract for one bitcoin with 2x leverage, that means the broker (say, Binance) will loan you an additional bitcoin. By doing this, you can increase your profits in an exponential way.
The risk, however, is that Binance reserves the right to “liquidate” your contract if it becomes too risky for them. If you hypothetically buy a futures contract for one bitcoin with 5x leverage that expires in 3 months, for $20,000/bitcoin, Binance will loan you 4 Bitcoins. If the price of bitcoin is $30,000 when the contract expires, you will make a lot more money than if you simply purchased 1 bitcoin.
The catch is that if, after one month, the price of bitcoin falls to $15,000, Binance might feel this is too risky, and liquidate the contract. When you get liquidated, you lose your entire $20,000 investment, whereas if you simply invested that into bitcoin, you’d only be down $5,000. Binance provides up to 125x leverage, which is extremely aggressive even by crypto standards.
Futures are generally considered risky, and it is important to be experienced and well educated on them. Binance offers two types of futures as follows:
Perpetual or Quarterly Contracts Settled in Cryptocurrency
This offering is a futures contract, either settled quarterly or open in perpetuity (and can be executed when you choose) with the settlement payment made in crypto. This basically means that if you buy a bitcoin futures contract, you will be paid in bitcoin when the contract expires.
Perpetual or Quarterly Contracts Settled in BUSD or USDT
These futures offerings are exactly the same as the ones settled in cryptocurrency, except they are settled in stablecoins. This means that if you buy a bitcoin futures contract, you will be paid in BUSD (Binance USD Coin) or USDT (USD Tether) upon expiry. There is no real difference otherwise between these two offerings, and the choice is a matter of preference.
How to Trade Futures on Binance
Trading futures on Binance is simple. You first have to create a Binance account and fund it from a bank transfer. Once you have a funded account, you click on the derivatives tab, and choose the future you wish to trade. From here you can choose the type of futures contract, the settlement, the amount of leverage, how many contracts you want to buy, and execute the trade.
The derivatives tab also has a lot of information on the market such as price charts, 24 hour volume, 24h high and low, and market depth. Further, you can execute the following trades on Binance futures: Limit order, Market order, Stop Limit order, Stop Market order, Trailing Stop order, Take Profit order, Post Only order.
Trailing Stop Order
This is similar to a stop limit order as explained in the article about different types of exchange orders, but instead of a hard number to execute a trade, it’s a number near the market price that “trails” the current price. So, if you have a trailing stop order that is $2,000 below the current market price of $25,000, and the market price goes to $30,000, the “trailing stop order” will move from $23,000 to $27,000.
Take Profit Order
A take profit order is the opposite of a stop limit order. Instead of setting a stop limit order to prevent losses, you set a take profit order at a price higher than market price to execute if the price reaches that level, guaranteeing the trader realizes a profit on the initial trade.
Post Only Order
Post only orders are a bit confusing, as they are designed to only execute if the order can be placed in the order book and is otherwise immediately canceled. These are used to ensure a market-maker rebate. This type of order simply ensures that you pay less in trading fees.
The Stoic AI automatic trading bot utilizes 2 futures strategies, Fixed Income and Long Only. Fixed income is a more conservative strategy with steady returns even in turbulent market conditions. Long Short is a strategy that is more aggressive in nature that capitalizes on the extreme market swings of Ethereum.
If you are an investor who is looking for a more passive solution to crypto investing, Stoic AI can become your favorite new portfolio management tool.
- Futures are contracts to buy or sell an underlying asset at a future date
- Most futures contracts involve leverage trading in which the trader borrows money from the broker to increase their profits
- Futures can be risky. The more leverage involved, the higher the risk
- Binance has quarterly and perpetual futures contracts settled in cryptocurrency and stablecoins
- It is inadvisable to manually trade futures if you are not experienced and disciplined
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Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.