Futures Trading Explained: A Beginner's Guide to Perpetuals in Crypto
Crypto futures trading plays a significant role in the crypto industry, offering traders new opportunities to profit from crypto price movements.
In fact, combined with options contracts and other derivatives products, futures accounted for the majority of the crypto market's trading volume over the past few years. Even after the launch of spot Bitcoin ETFs in the US, which significantly increased spot BTC's share, crypto derivatives continue to dominate the trading space.
In this article, we will take a look at futures trading, its significance in financial markets, how it works in the crypto industry, its potential benefits and risks, as well as how to get started.
What Is Futures Trading?
Futures trading refers to the practice of trading futures contracts. As a type of derivative, futures represent contracts to buy or sell an underlying asset (e.g., USD, gold, Bitcoin, and Ethereum) at a set price at a future date (the expiration date).
However, not all futures contracts have an expiration date. A type of futures called perpetual futures (also known as perpetual swaps or perpetuals) do not expire, allowing traders to speculate on the prices of underlying assets while holding the contracts virtually indefinitely.
Interestingly, perpetual futures are the most popular variants of futures contracts in the crypto market, meaning you are more likely to find these instruments offered by crypto exchanges than their traditional counterparts.
Besides speculation and amplifying exposure, crypto futures also enable traders to hedge against market risks, such as volatility. In fact, traditional futures contracts were designed with hedging as their primary use case.
How Crypto Futures Trading Works
To understand how crypto futures trading works, it is essential to take a look at its main components:
| Component | Description |
|---|---|
| Leverage | Just as with margin trading on VALR’s spot markets, you can trade crypto futures with leverage to amplify your potential gains (or losses). This means you take additional risks by borrowing capital on top of your initial deposit to increase your trading size. |
| Units per contract | This component determines how much the underlying instrument is worth for each contract. This can vary per platform – for example, one contract may equal multiple BTCs on one exchange, while other providers may set this rate at only a few dollars per contract. |
| Expiration date | All traditional futures have an expiration date, which refers to the date when the contracts should be settled at the pre-agreed price. Optionally, traders can sell their crypto futures to others before the settlement date occurs. Perpetual futures have no such expiry. |
| Funding rate | A special mechanism called the funding rate is in place to keep futures prices as close as possible to the underlying asset's spot price. When futures prices are higher than the spot price, the funding rate turns positive, requiring buyers (longs) to pay sellers (shorts) the funding amount. In contrast, the funding rate becomes negative if the futures price is lower than the spot price. In this case, longs pay funding to shorts. |
Futures can be settled in two ways. First, in terms of a physically delivered contract, the buyer purchases and receives crypto after settlement. On the other hand, cash (e.g., USD) is transferred between the buyer and seller upon settlement when the contract is cash-settled.
What Are the Potential Benefits and Risks of Crypto Futures Trading?
We have collected the potential advantages and risks of cryptocurrency futures trading in the table below:
| Benefits | Risks |
|---|---|
| You can amplify your potential gains with leveraged futures trades. | Futures are high-risk financial instruments, and leveraged trades translate into higher risks, with a greater chance for unfavorable price movements which can lead to account liquidation. |
| Futures trading allows you to hedge against market volatility, unfavorable price movements, and other risks by opening trades in the opposite direction of existing trades to offset potential losses of the primary position. | Due to the risks of derivatives, crypto futures trading is banned or restricted in some jurisdictions. |
| Gain exposure to crypto without actually purchasing the underlying asset. | You can gain exposure to the price of the underlying asset while settling in USDT, other stablecoins and on VALR even South African Rand. |
| You have the ability to short crypto with futures. | Despite the funding rate, the price of futures contracts may still differ from the spot market price. |
| The crypto futures market is highly liquid. | However, compared to the spot market, only a limited number of digital assets are available for futures trading. |
| Crypto futures pairs often feature lower trading fees than spot market fees (e.g., takers pay 0.05% for trading spot crypto-to-crypto pairs and only 0.04% for perpetual futures pairs on VALR). |
Get Started With Futures Trading on VALR
Crypto futures trading allows traders to improve their capital efficiency and amplify their potential profits, short digital assets, and hedge against market risks without actually owning the underlying cryptocurrency.
However, we must remind you that crypto futures trading is a high-risk activity, which can lead to losses for inexperienced traders. Thus, we recommend reading VALR's Perpetual Futures Trading Guide to learn the basics. Be sure to also check out this article on our blog to find out more about how to maximise your potential futures earnings.
Follow the below steps to get started with futures trading on VALR:
Log into your account or create a new one here.
If you haven't already done so, pass KYC, as it is a mandatory step to start futures trading.
Deposit funds to VALR. In South Africa, you can fund your VALR account via a bank transfer or a South African-issued credit or debit card.
Choose "Futures" from the "Pro Trading" menu and select your preferred trading pair.
Click the "Enable Futures" button at the top right corner to verify your address, create and select a subaccount, as well as accept VALR's risk disclosures.
Set the parameters of your trade (e.g., the order type, the amount, and the leverage) and place your order. Be sure to set a stop-limit order as well to keep your risks under control.
Close your position to cash out your profits (or avoid further losses).
Frequently Asked Questions
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Crypto futures trading refers to trading futures contracts, which are agreements to buy or sell an underlying asset (e.g., Bitcoin, Ethereum) at a predetermined price at a future date. Crypto futures allow traders to speculate on the price movements of cryptocurrencies without owning the underlying asset.
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You can buy crypto futures on VALR.
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Traditional futures contracts have an expiration date, but perpetual futures do not expire, allowing traders to hold these contracts indefinitely.
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Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.
VALR (Pty) Ltd is a licensed financial services provider (FSP #53308).
Futures trading is provided by VALR DAM Pty Ltd as a Juristic Representative of CAEP Asset Managers Pty Ltd (FSP number: 33933) an authorised financial services provider.
Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
