July 10, 2020

Why your trader bought futures: three reasons to use this financial tool

In a previous article, we considered the characteristics of crypto futures in comparison with common ones. Today we’re focusing on cases: why traders buy futures and when it’s really profitable.

What a buyer takes?

Futures are derivative financial instruments (derivatives); basically, it’s kind of securities in electronic format. It’s a contract legitimized by a cryptocurrency exchanger. The subject of this contract is selling or buying cryptocurrency according to the determined price.

During stock-market speculations derivatives can be bought or sold as a self-contained asset: a trader can operate with this “contract” without any tokens in the account.

Profitable situations

A derivative’s price always depends on the price of the underlying asset. Therefore, trading with futures is profitable when you see sharp jumps in the price of cryptocurrency: collapses and rallies. And in a “plateau” situation it’s not really profitable.

Three key ways to earn money (directly or not) with crypto futures:

  • Bitcoin savings insurance when the price collapses.
  • Earnings on speculation.
  • Profit from the "arbitrage" of a cryptocurrency

Let’s see all the cases and the profit from each of them.

Bitcoin savings insurance

If an investor didn't buy bitcoin at the most advantageous moment, there is a risk of a collapse of the course and strong subsidence in the asset price. In this case, there is a reason to buy futures to fix a favorable price.

Earnings on speculation

Futures are good for margin trading because they have a low threshold. They require a security deposit, 30-50% of its value to open a position. But at the same time, futures trading is more complicated than trading with common digital assets. So if you work with an experienced trader, but do not have a large capital, derivatives are a good option.

Profit from the "arbitrage"

This way of speculation with futures is quite difficult, but the risk is low. Profit is derived from the gap in price for futures with different maturities. The process is described with details in this article. Arbitrage always brings a profit, regardless of the dynamics of the course, but during periods of sharp fluctuations, it is higher.

Futures is a quite flexible financial tool to make good profit with any dynamics of the cryptocurrency rate. But you need to use it carefully. If a trader suggests you invest in derivatives, make sure he has enough experience with them. Traders' profiles on Equite.io show their success in futures trading on two major exchanges, Bitmex and Binance. This is a good opportunity to verify the skill of your asset manager.