Beginner's Guide to Cryptocurrency Contracts | Essential Knowledge for Starting from Zero
For those who have just entered the cryptocurrency world, are you confused about contract trading? Don't panic, today I'm here to educate you on the basic knowledge of cryptocurrency contracts to help you easily get started.
1. What is a cryptocurrency contract
A contract, also known as a futures contract, is referred to in English as FUTURE. In the cryptocurrency world, making a contract trade is like two people signing a contract.
The contract is measured in lots, and the smallest trading unit is one contract.
Contracts can be newly signed, for example, if you sign a new contract with someone else, the total number of contracts in the world will increase by 1. It may also be that someone transfers an existing contract to you, in which case the total number of contracts remains unchanged.
2. The difference between contracts and spot trading
Spot trading involves paying cash and receiving goods simultaneously, ensuring that the transaction is settled completely. In contrast, in cryptocurrency contract trading, the parties typically trade not physical goods but expectations of future prices.
For example, if one person believes that Bitcoin (BTC) will rise in the future, while another believes it will fall, they can sign a contract to bet against each other. The essence of the contract is a zero-sum game, where one party's profit is the other party's loss.
The biggest difference between contracts and spot trading 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 volatility and liquidity of the cryptocurrency.
3. The secret of leverage
Assuming Bitcoin is currently priced at 50,000 units, and the margin for one contract is 50 units. If you use 100 times leverage, the contract value will be 5,000 units. If you only have 50 units in your wallet, a 1% drop in price will lead to liquidation.
However, if there are 2500 units in the wallet, all of this money can be used as margin, making the actual leverage 2 times, rather than 100 times. Therefore, the size of leverage depends not only on the chosen leverage ratio but also on the funds in the wallet.
If you are new to cryptocurrency contracts, you must operate with caution, learn more, and understand more. If you have any questions, feel free to leave a message, and we can discuss it together.
