Beginner's Guide to Cryptocurrency Contracts
Beginner's Guide to Cryptocurrency Contracts | Essential Knowledge from Zero
For those new to the cryptocurrency world, are you feeling confused about contract trading? 😵 Don't worry, today we'll explain the basic knowledge of cryptocurrency contracts to help you get started easily～
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1. What is a Cryptocurrency Contract?
A contract is also called a futures contract, and in English, it is FUTURE. In the cryptocurrency world, making a contract trade is like two people signing a contract 📄. Contracts are measured in lots, and the smallest trading unit is one contract.
Contracts can be newly signed, for example, you sign a new contract with someone else, and the total contract holdings in the world will increase by +1. Alternatively, someone might transfer an existing contract to you, in which case the total number of contracts remains unchanged.
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2. The Difference Between Contracts and Spot Transactions
Spot trading is a straightforward exchange of money for goods, with both sides settled 💴. However, in cryptocurrency contract trading, the parties involved are usually trading not physical goods, but rather their expectations of future prices.
For example, one person believes that Bitcoin (BTC) will rise 📈, while another believes it will fall 📉. They can sign a contract to bet against each other. Essentially, contracts are zero-sum games, where one party's profit is the other party's loss.
The biggest difference between contracts and spot transactions is the ability to leverage and short-sell. Leverage is used to adjust the margin ratio, and the leverage multiple for each contract is set by the exchange based on the cryptocurrency's volatility and liquidity.
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3. The Secret of Leverage
Assuming Bitcoin is currently priced at $50,000, and the margin for one contract is $50. If you open a 100x leverage, the value of the contract would be $5,000. If you only have $50 in your wallet and the price drops by 1%, you would be liquidated 😱.
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However, if you have $2,500 in your wallet, that money can be used as margin, making the actual leverage 2x, not 100x. Therefore, the size of the leverage depends not only on the chosen leverage ratio but also on the funds in your wallet.
