Since the beginning of this year, I have clearly felt that the popularity of contracts in the cryptocurrency circle is very high. A very clear example is that those who were once conservative have started playing contracts, or at least changed their attitudes.
When I first entered the cryptocurrency circle, there was such a disdain chain within the circle:
The mainstream coin value investors look down on the value investments of altcoins.
Long-term investors look down on wave traders.
Wave traders also look down on those who use contract leverage.
Anyway, at that time, there was such an atmosphere in the circle; I didn’t know what leverage or contracts were, but I knew that this stuff couldn't be played with, as playing with it would lead to bankruptcy, because the big players and all the seasoned investors said so.
Of course, now, I have accumulated certain experiences and understand the reasons for their statements, which are indeed well-intentioned. Because in the aforementioned disdain chain, the risks increase as you move further back, although the potential returns also increase.
So why has trading contracts gradually shifted from niche to mainstream this year?
I think there are the following reasons:
First, the underlying technology of blockchain has encountered bottlenecks, and many projects cannot be implemented, making it hard to tell stories about hundredfold coins or thousandfold coins.
Second, mainstream coins have already risen too much, and many people, especially new investors, believe that there’s not much room for growth left, and due to entering the market late, it feels like they are picking up the tab for previous investors, leading to psychological imbalance. Many are not very enthusiastic about mainstream coins.
Third, trading spot in waves, most people only have a small amount of gains at that point in the spot market, and the returns are not very high, at least there is a significant gap from their expectations.
What kind of people come to the cryptocurrency circle?
Most people are looking to make big money, especially after hearing many stories of turning ten thousand into millions, getting rich overnight, very few have the goal of holding for ten years and turning ten thousand into a million. If that were the case, it wouldn't be much different from saving up money through work; they just don’t want to work and want freedom, at least to speed up that process, which is why they come to the cryptocurrency circle.
Exchanges are quite clever; they have captured the pain points of retail investors in the cryptocurrency circle and have introduced contract products accordingly. In fact, the concept of leveraged contracts has long existed in traditional financial markets, but why does it make so many people wary in the cryptocurrency circle?
Because the biggest problem in the cryptocurrency circle right now is the lack of formal regulations and relevant laws for investor protection.
Many exchanges, mainly referring to some shady exchanges, do not have qualifications and may not have the necessary technology, but to attract users, they can offer extremely high leverage of hundreds of times. Such leverage, in extreme market conditions, like the previous crash on March 12 in the cryptocurrency market, can lead to serious problems. Moreover, if the technology is poor, it may cause unexpected liquidations for users, but the exchange may not compensate or even refuse to take responsibility.
What about regular exchanges?
Here it refers to exchanges with proper licenses, a certain scale of operations, and technical strength, such as the 'three major' exchanges known to everyone in the cryptocurrency circle.
A regular exchange, only in terms of capital scale and technical level, has a lower probability of encountering problems first; moreover, even if problems arise (technically), they will compensate users for the sake of their brand reputation. But they cannot reduce the inherent risk of high-leverage contracts.
In fact, to cope with competition and slice the market pie, the three major exchanges have also successively launched high-leverage perpetual contracts, with a maximum leverage of 150 times.
Many things have duality, even multiplicity, which requires us to examine each matter deeply. Many of the problems people face may stem from flat, one-dimensional thinking. This is something everyone finds hard to avoid at the beginning because the progress of thought increases day by day, but at the initial stage, we need to learn to think about the characteristics of things from different angles in order to better and faster develop ourselves and adapt to the needs of society. Confucius said: 'Think thrice before acting.'
So, after saying so much, can contracts in the cryptocurrency circle actually be played?
First, my answer is yes.
However, this is very important; everything needs to be viewed comprehensively.
Contracts can indeed amplify returns, but they also significantly increase risk, and due to their liquidation mechanism, they are much crazier than spot trading.
For example, I have ten thousand yuan and want to play Bitcoin contracts.
I think it will rise, so I open a long position with 50 times leverage (other multiples can also be used). If Bitcoin really rises by 1%, I earn 50%, but if I judge incorrectly (which often happens), and Bitcoin drops by 1%, I lose 50%. At that point, if I can't take it and choose to stop-loss and exit, in the end, I would have turned ten thousand into five thousand.
If I choose to continue to hold, but the market doesn’t cooperate and continues to fall, I will be liquidated, meaning I lose all my ten thousand.
The specific liquidation ratio varies slightly from exchange to exchange. Some may lose all when their capital drops by 75%, while others may lose all when it drops by 80%. But basically, they will force you to liquidate before you lose ten thousand on paper, taking your ten thousand because you still need to pay fees to the exchange.
However, if you play in the spot market, even if it drops several times, as long as you are sure that the coin itself is not worthless, what you lose is just a numerical figure on paper, your position remains intact, then this is just being trapped, and there will be a time for liberation or even profit later. Because there is no market that only falls and does not rise, as long as you really choose good targets and wait patiently, you will be fine.
In fact, the function of contracts is to hedge risks, that is, to short.
Because in the spot market, you can only make money when the price goes up; when it goes down, you just have to wait.
But now, the people in the cryptocurrency circle clearly do not play this way; everyone is going for the function of amplifying returns.
So let me talk about some of the risks involved.
In addition to the aforementioned liquidation mechanism, contracts also have an invisible danger that most new investors may not realize.
That is, it will slowly harvest you like boiling a frog in warm water.
This is something I realized recently while trading contracts.
Generally, experienced traders or those with some risk control awareness will set stop-losses when opening contracts because this can prevent liquidation. It can also be said that whether or not to set stop-losses is a distinction between new and mature players.
This method is indeed a good strategy for playing contracts because it exchanges quantity for quality, as investment itself is a probabilistic event, and no one can know for sure how the market will move after each order is placed.
Advanced traders will open positions at points they are confident about, but even so, it is possible to buy in the wrong direction, at which point stop-loss becomes effective. But if the direction is correct, they will make a large profit.
The result of this system is typically 'small losses and big gains', which is the ideal outcome of investing.
However, this system is not suitable for everyone.
Especially when your capital is already limited. Because this is a trial-and-error system; every time you buy in the wrong direction, you will incur small losses until you finally buy in the right direction. But the problem is, you don’t know when you will buy in the right direction, your capital is gradually decreasing, and there’s an even more serious issue: people tend to be cautious when making money and like to take risks when losing money. As your capital decreases, the next time you open a position, you may tend to take risks, disregarding rational decision-making, and end up losing even more.
I think this way of playing is more suitable for those with large capital. Because in a game with the same winning rate, it is obvious that they have more capital and can play more times, which gives them an overwhelming advantage in the long run. If your capital is small and can't withstand fluctuations, you may exit quickly.
I am Xiao O, a professional analyst and teacher, a mentor and friend on your investment journey! As an analyst, the most basic thing is to help everyone make money. I resolve confusion and trapped positions, speak with strength, and when you lose your way and don’t know what to do, follow Xiao O, and Xiao O will point you in the right direction.