Crypto Futures and Traditional Futures: Know the Difference

Futures trading is among the most demanding trading types for both purchasers and sellers. It requires good knowledge of market trends and analytical abilities. When it comes to crypto-futures trading, things complicate even more due to the unstable nature of cryptocurrency. How to trade crypto-futures to gain profit and how are they different from traditional futures trading? Here, you will find all the needed information.

Futures Trading: Some History and Basics

Futures trading is, probably, among the oldest trading types. The very first mention of goods and services to be delivered for an agreed price at an established future date was found in the Code of Hammurabi, the first legal code, dated around 1750 BC.

The first modern futures trading began in 1710 at the Dojima Rice Exchange in Osaka, Japan.

Now, futures trading has become more organized but the principle is the same.

Now, a futures contract is a predefined agreement to buy and sell a specific commodity or currency at a pre-agreed price.

The initial investment is not necessarily about purchasing the asset. It is about the purchase of a contract representation of the asset. Traditional futures focus mostly on either financial assets (bonds, stocks) or commodities (crude oil, gold, wheat).

Traders participate in futures contracts because, with it, they can add leverage to an investment.

Leverage is the use of borrowed funds. It is used to increase the return on a specific investment.

When it comes to futures trading, both the seller and the buyer have some obligations and accept some risks. When a futures contract reaches its expiration date, the seller is obliged to provide the asset at the pre-agreed price, and the buyer is obliged to purchase it. The aim of futures contracts is to protect investors from price fluctuations in the market.

Trades with traditional futures are usually made by big investors who have significant resources. The thing is that the leverage is established by Initial Margin and Maintenance Margin. To enter a position and maintain it, an investor shall have specific capital. This capital shall be sufficient to maintain the position. If the capital is not sufficient, the broker would force-close the lost position.

Traditional Futures Trading vs. Crypto Futures Trading

Crypto futures are similar to traditional features. The underlying assets of crypto futures are cryptocurrencies. For now, we speak mostly about Bitcoin and Ethereum.

• They all make use of leverage. Leverage is a concept that means that investors aren’t obliged to have the entire capital amount to take on a specific position. It heightens the capital efficiency to allow traders to take on bigger positions. The leverage is established by the so-called Initial Margin and Maintenance Margin levels. So, to enter and to maintain the position, an investor shall have a minimum amount of a specified entity.
• Both types of futures involve a certain level of risk.
• The market, including the crypto market, is responsive to speculation. The higher the speculation level is, the more willing are the investors to take risky bets. So, if you believe that Bitcoin will grow in price, you can enter a futures contract with a long position. If the speculation is correct, your investment is going to pay off.
• The futures contracts can be also used to hedge against the underlying asset. If you believe that Bitcoin has entered a bearish trend, you might want to protect your funds. However, if the investor believes that in the long term, Bitcoin is going to grow, they might bet against it by entering a short-term futures contract to avoid losses and to make money when the asset value falls. Hedging is good to cover losses in case of unexpected events when losses are possible. Some investors might even hedge their entire portfolios if they believe that the market is going to fall.

The Differences

Cryptocurrency and commodities are completely different things. Even though traditional and crypto futures trading approaches are similar, there are significant differences. So, their market structures differ significantly.

Regulation

Traditional markets are regulated. They function based on laws and standards that protect their participants from fraudsters, market abuse, and other illegal activities in general. It is convenient but it also means that every exchange shall be approved first. Only then, it can be executed. It slows down the trading process significantly.

The cryptocurrency market is not regulated. Therefore, regulatory approvals aren’t required for trades. Trades are performed much faster which is a significant benefit considering the volatile nature of cryptocurrencies.

Volatility

While traditional markets are highly volatile, their volatility level cannot be compared to the volatility level of cryptocurrency markets. The emerging markets are in general more prone to drastic fluctuations. Therefore, we can expect that with time, the cryptocurrency markets will become more stable.

Trading Hours

The time when traders can trade futures contracts differs in the traditional and cryptocurrency markets. Traditional markets permit trading for about 13 hours every day. In case some major external events occur that influence the asset price, trading might not be available in a traditional market. Therefore, it is more difficult to benefit from unexpected price changes of an asset.

Cryptocurrency markets are available 24/7. Traders who earn profit from tuning with crypto asset performance can benefit from it greatly. It also allows traders to benefit from daily fluctuations.

Market Size

Traditional markets have been around for ages. They are incomparably bigger than cryptocurrency markets. So, the largest exchanges CME and ICE are worth hundreds of billions of dollars. Huge corporations and institutional investors participate in trades there constantly.

Crypto futures markets are mostly focused on individual investors. Bitcoin and Ethereum, the two major cryptocurrencies, have just started entering the mainstream market. It is still a long way ahead for cryptocurrency markets to become comparable to traditional ones in terms of size.

Bottom Line

Both traditional and cryptocurrency futures trading offer significant opportunities to get significant rewards. Traditional markets are protected by legal and financial requirements. However, they are slower. Cryptocurrency markets accept anybody willing to participate. The transactions don’t require an intermediary and thus, no fees shall be paid. Whatever option you choose, if you approach trading wisely, you can benefit.

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