Cryptocurrency contracts are a type of leveraged futures trading, which allow traders to make big gains with small gains when predicting the price trend of virtual currencies, and can enlarge profits in both bull and bear markets.
Different from the traditional financial market, the virtual currency market has also launched "perpetual contract trading" products with greater leverage and no time limit for transactions. Therefore, this article will fully introduce the concept, types, trading methods, and Risks and suggestions, etc., allowing you to quickly master the secrets of virtual currency contract trading.
What is virtual currency contract trading?
Cryptocurrency contract trading is a futures contract that allows traders to go long or short based on their predictions of the future price movement of cryptocurrencies. If the trader's prediction is correct, he or she can make a profit; otherwise, he or she will suffer a loss.
The difference between virtual currency contract trading and traditional futures trading is that virtual currency contracts are usually leveraged transactions.
Leverage means that traders can use small amounts of funds to operate large amounts of assets and obtain high returns through magnification, but it will also magnify losses. Therefore, virtual currency contract trading has the characteristics of high risk and high return.
Cryptocurrency contract trading types
In virtual currency contract trading, there are three main types, including perpetual contracts, delivery contracts and options.
Perpetual contract
It is a contract with "no expiry date" and traders can hold positions as they wish. Perpetual contracts are usually index prices based on spot prices and charge a "funding rate" "regularly".
Delivery contract
It is a contract with an expiration date, and traders must close their positions before the expiration date of the contract. Delivery contracts are typically cash-settled based on the spot price and settle on the contract expiration date.
Options (options)
Also often referred to as option trading in Taiwan, it is a type of trading that gives traders the right to buy or sell virtual currencies within a specific time in the future, rather than actually performing the transaction.
There are two types of options, European options and American options. European options can only be exercised on the expiration date. American options can be exercised before the expiration date.
To put it simply, to purchase an option contract, an investor must pay a premium. When the investment direction is correct, the option can be sold to obtain profits. If the investment direction is wrong, the investor may not exercise the right and only forfeit the premium as compensation.
What is a perpetual contract?
Perpetual contracts are a product launched by the virtual currency exchange BitMEX in 2016. So far, they have become a common contract type in virtual currency contract transactions. The difference from traditional futures is that they do not There is no expiry date limit.
Perpetual contracts maintain reasonable prices through a funding rate mechanism. Investors can hold positions indefinitely as long as they pay funding fees on time. This trading method is highly flexible, but it requires traders to take the initiative to take profits or stop losses to close positions, otherwise losses may occur.
The advantages of perpetual contracts include:
24/7 trading: Perpetual contracts can be traded around the clock without worrying about contract expiration.
Leveraged trading: Perpetual contracts can be traded with leverage to make a big difference with a small amount.
High liquidity: Perpetual contracts have high liquidity and are easy to trade.
Perpetual contract transaction fee = funding rate + taker/pending order handling fee
What is the funding rate?
As mentioned above, funding rate is an important concept in perpetual contract trading, which is used to balance the interests between longs and shorts.
When there are more long positions than short positions in the perpetual contract, the funding rate is positive, which means that the long positions need to pay fees to the short positions.
When there are more short positions than long positions in the perpetual contract, the funding rate is negative, which means that the short position needs to pay fees to the long position.
The funding rate will change according to market conditions. In most exchanges, the funding rate is settled every 8 hours, usually at 08:00, 16:00 and 24:00.
However, in extreme cases, the exchange has the opportunity to adjust the charge to once an hour to balance the power of the long and short sides, so users must also take their risks into consideration.
U standard VS currency standard?
There are two types of virtual currency contracts: U-based contracts and currency-based contracts. The main difference is the "unit of accounting".
U-based contract
Refers to contracts that use stablecoins as margin and settlement currencies. A stablecoin is a cryptocurrency pegged to a fiat currency, such as Tether (USDT) and USD Coin (USDC). The advantages of U-based contracts are:
Higher Leverage: Since the value of USDT or USDC is relatively stable, the leverage of U-standard contracts is usually higher than that of currency-based contracts.
Lower risk: U-margined contracts have lower risks than currency-margined contracts because the price of stablecoins is relatively stable.
Coin-margined contract
Refers to contracts that use virtual currency as margin and settlement currency. The advantages of currency-based contracts are:
Higher income potential: Excluding leverage, the income potential of currency-based contracts is higher because of the greater growth of virtual currencies in the future.
Unaffected by fiat currency fluctuations. U-based contracts are affected by the exchange rate of fiat currencies such as the U.S. dollar.
Directly track the price changes of the cryptocurrency itself: better reflect the value of the cryptocurrency.
Recommended virtual currency contract exchanges
When choosing a virtual currency derivatives exchange, you need to consider the following factors:
Security: Security of an exchange is one of the most important considerations. Exchanges need to have complete security measures to protect users’ assets.
Liquidity: The higher the liquidity on an exchange, the easier it is to trade.
Functions: The richer the functions of an exchange, the easier it is for traders to find a trading method that suits them.
Handling fees: The lower the exchange’s handling fees, the lower the trader’s costs.
Here are some of the more popular virtual currency derivatives exchanges:
Binance: Binance is the world’s largest virtual currency exchange. Binance’s security, liquidity, functionality and fees are all leading indicators in the market.
Cryptocurrency contract trading tutorial (taking Binance as an example)
After the user completes the exchange registration, as long as he deposits funds, he can go to the "Contracts" trading page to perform related derivatives operations. The relevant introduction will be based on the Binance Exchange's perpetual contracts.
Derivative types and token information: including token selection, derivative types, mark prices, index prices, funding rates, etc.
Market trend chart: currency price trend, the length of time can be switched. In addition, in the cryptocurrency world, green usually represents rising and red represents falling. Order history: a record of executed orders.
Market order book: The current buy and sell orders in the market also represent the depth of market flow.
Latest transaction records: Completed market transaction records.
Order placing and trading area: actual order placing transaction block.
Personal order area: After you complete the order, the order you placed will appear here.
Order buying and selling area
When ordinary investors conduct their first derivatives transaction, the most common problem they encounter is that they cannot understand the order placing and buying area, so we will use this section to give a further detailed introduction:
Billing type:
Limit order: Commonly known as a pending order, an order is placed at a specified price.
Market order: Commonly known as a taker order, an order is placed at the latest market price and is usually completed immediately.
Advanced usage: In addition to limit orders and market orders, virtual currency exchanges also provide some advanced usage, such as: market price take profit and stop loss, limit price take profit and stop loss, tracking order, Maker only, etc., details Please refer to the official Binance article.
Price: refers to the market price at which you want to place an order. For example, if you wanted to open a long position when the BTC price was 30,000, you would fill in the price as 30,000.
Quantity: The number of tokens you want to place an order to purchase. If you don’t want to calculate, you can directly slide the diamond on the screen and the system will automatically adjust it according to the capital ratio.
Leverage multiple: the multiple you want to open. The higher the leverage multiple, the greater your profit or loss will be. Binance futures can reach a maximum of 125 times. Investors should pay attention to the risks. Users can directly click on the "Small Computer" in the upper right corner. ”, it will automatically help you calculate the profit and liquidation price.
Full warehouse/running warehouse:
Cross-margin mode: All available funds are used as position margin to obtain higher returns.
Isolated position mode: Each position has an independent margin. The advantage of the isolated position mode is that it can effectively control risks. Even if one position is liquidated, it will not affect other positions.
Derivatives Buy/Sell: Do you want to buy (long) or sell (short)
Security Risks and Recommendations
Cryptocurrency derivatives trading can create the myth of sudden "riches", but of course it can also lead to a "bad" life. Investors should pay attention to the following risks when starting to trade derivatives:
High volatility risk: The virtual currency market is highly volatile, and investors may face huge risks of losses.
Leverage risk: Leverage can be used in derivatives transactions, which can magnify returns but also magnify risks. If the price fluctuates in the opposite direction, it may lead to liquidation and total loss.
Regulatory risks: Regulation of the virtual currency derivatives market remains incomplete, which may increase investor risks.
Therefore, in order to deal with the trading risks of investing in virtual currency derivatives, we hope that investors can refer to the following suggestions:
Starting from simulated trading, most well-known exchanges provide tools for simulated trading.
Beginners should start with spot trading and then proceed to derivatives trading after becoming familiar with market operations.
Do not use too high a leverage ratio to avoid liquidation.
Don't put all your money into derivatives trading, keep some money aside to cover the risks.
Review your trading strategy regularly and make adjustments according to market conditions.
Understand relevant knowledge and risks: Before investing in virtual currency derivatives, investors should fully understand relevant knowledge, including funding rates, liquidation mechanisms, leverage risks, token potential, etc.
Set up stop-profit and stop-loss: Using stop-profit and stop-loss can reduce the risk of liquidation.
Summarize
In summary, virtual currency contract trading is a high-risk, high-yield investment strategy that allows traders to obtain maximum returns with limited funds.
But in contrast, users must also bear the risk of liquidation. If users do not formulate strict risk management strategies, no matter how much money they make, they will lose it one day.
Therefore, before traders start investing, remember to fully understand the relevant knowledge and start with a small amount of money, and always only invest in risks that you can bear.
