Binance Futures is one of the largest and most well-known platforms globally for futures trading in cryptocurrencies. These platforms provide opportunities for substantial profit using leverage, whether in bullish or bearish markets. However, with these great opportunities come much greater risks, and the fundamental question that many ponder is: where does the profit money I make come from, and where does my money go when I lose in futures trading?
Let's uncover the secrets of this process and understand the flow of money in the world of futures trading.
Basics of futures trading on Binance Futures 🎢
Unlike spot trading where you buy or sell the cryptocurrency itself directly, in futures trading you are trading 'contracts' that represent the value of the underlying asset. These contracts allow you to bet on the price rising (opening a long position) or falling (opening a short position).
The main advantage, and source of high risk, is leverage. Leverage allows you to control a position size much larger than the actual capital you have in your futures trading wallet (margin). For example, a x10 leverage means that every $1 of your money controls a position worth $10 of the asset.
The most common type of contracts in crypto are perpetual futures contracts, which have no specific expiration date and remain valid as long as the trader's margin is sufficient to cover their requirements.
Where do your profits come from... and where do your losses go?
This is the crucial point to understand:
* Profits come from losses (and vice versa): futures trading is, at its core, a zero-sum game among traders. For every long position opened, there is another party opening a short position of the same size, and vice versa.
* When you win your position (for example, you opened a Long and the price rose): the money you earned comes directly from the trader (or group of traders) on the other side of the trade (who had opened a Short position) and lost due to the price increase.
* When you lose your position (for example, you opened a Long and the price dropped): the money you lost goes directly to the trader (or group of traders) on the other side of the trade (who opened a Short) and profited from the price decline.
In short: your profit is another trader's loss, and your loss is another trader's profit.
* Funding Rate: In perpetual contracts, there is a mechanism called 'Funding Rate'. These fees are financial transfers that occur periodically (often every 8 hours) between traders themselves based on the difference between the futures contract price and the spot asset price. If the futures contract price is higher than the spot price (often occurs in bullish trends), traders with long positions pay fees to traders with short positions, and vice versa if the futures contract price is lower. This money goes from one trader's wallet to another trader's wallet, and is not usually a fee for the platform.
* Liquidation and Insurance Fund:
* Liquidation: Using leverage, your margin (the capital you used in the position) covers a small portion of the total position size. If the price moves sufficiently against your position, and your margin is no longer enough to cover the increasing losses, the platform will automatically forcibly close your position. This is 'liquidation' or 'margin call'.
* Where does the liquidation money go? The remaining funds in the liquidated position's margin are primarily used to pay off the losses incurred by the liquidated trader, ensuring that the winning party in the trade receives their full profit.
* Insurance Fund: In some cases (especially during very rapid price movements), the remaining margin in the liquidated position may not be enough to cover the entire loss. Here comes the role of the platform's insurance fund (such as the insurance fund in Binance Futures). This fund is a pool of money used by the platform to cover deficits in severe liquidation cases. Any 'excess' funds that may result from liquidating a position with significant margin (if it closes at a better price than the expected liquidation price) can also go into this fund to help compensate it.
The role of Binance in this process:
Binance does not profit directly from traders' losses. Binance's main profit in futures trading comes from the trading fees it collects on every opening or closing of a position. The platform's role is to provide the infrastructure, match buy and sell orders, manage margin and liquidation systems, and manage the insurance fund to ensure market stability and prevent the 'auto-deleveraging' mechanism that could affect profitable traders.
Futures trading risks (additional information and tips) #MarketPullback
Futures trading is fraught with risks and must be approached with great caution:
* Leverage is a double-edged sword: it multiplies profits, but also multiplies losses equally. A very small amount of price movement against your position can lead to the liquidation of your position and loss of a significant part or all of your margin.
* Liquidation happens quickly: in volatile markets (#MarketPullback or sharp rises), your position can be liquidated in moments.
* Understanding margin is essential: Know the difference between the initial margin required to open the position and the maintenance margin required to keep it open.
* Cross Margin vs. Isolated Margin: Understanding how the way you use margin affects the risk of liquidation. In Cross Margin, the entire balance of your futures trading wallet covers all your positions, increasing the risk of liquidating the entire wallet if one position moves strongly against you. In Isolated Margin, each position has its own dedicated margin, and its loss is limited to that margin only.
* Futures trading is not for beginners: it requires experience, market understanding, and a strong risk management strategy that most beginners do not possess. Start with spot trading and learn well before entering futures trading.
In summary:
Profit money in futures trading on Binance Futures comes from the money of traders who lost in the same trade, and the loss money goes to compensate the traders who profited. The platform earns from trading fees and uses the insurance fund to ensure smooth operations in liquidation cases. With high leverage, futures trading offers very large opportunities but also carries liquidation risks that can lead to rapid loss of capital.
Learn well, start small, use very strict risk management, and never risk more than you can afford to lose. These are the most important lessons in the world of futures trading. #tradestories
Remember: This article is for explaining and illustrating how futures trading works and its risks, and is not financial advice or encouragement to engage in futures trading.
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