How To Produce Your Own Success Story As A Crypto Trader — A Quick & Easy Guide To Futures Trading
In Brief
- In crypto, you are either a trader, a hodler or both. I do both. This is because I like to use futures to hedge my spot assets to minimize the risk during market downturns.
- The purpose of this strategy is to maintain a neutral exposure as part of risk management for optimum profits.
- In the futures market, we use leverage to optimize risk management strategies. Leverage allows you to trade in any direction. That means you can take advantage of both rising and falling prices.
Crypto futures elicit a lot of curiosity but most people would rather wait until the next bull market to try them out.
This was evident during the 2021 bull market when a lot of people dabbled in futures for the first time.
But do you know that futures trading is actually one of the most effective ways to actively learn how to be a consistently profitable investor? Yes, I mean an investor, not just a trader.
And this boils down to risk management. The truth is, for you to become a consistently profitable trader, you have to be good in risk management.
The good thing about futures trading is that it forces you to learn risk management. And by extension, you can employ the same risk management strategies to protect yourself from undesirable risks in the spot market.
Beyond that, crypto futures is more advanced than the spot market and there are a ton of things that you can learn to sharpen your skills as an investor.
The difference between spot and futures markets
There are several practical differences between spot and futures. The stark difference between them is leverage.
Leverage is only available in the futures market and it typically lets you buy more or less than what you normally could.
Another thing that becomes more obvious when you start trading futures is that you can short.
Shorting is a trading strategy that aims to profit from falling prices.
The opposite of shorting is longing.
Longing follows the logic that prices will increase and it’s more of the same thing that you’d do by buying assets in the spot market.
When you start trading futures, you will see that shorting allows you to profit from declining prices of crypto assets as opposed to just profiting from rising prices.
Short selling can also be employed for hedging your crypto portfolio in undesirable market conditions.
In other words, shorting provides a practical way to maintain a neutral exposure for your overall crypto investment especially when there is anticipation of a bear market.
Personally, I use the shorting feature for both hedging and speculation (more on this below).
I trade futures on Binance and something you’ll note after opening the Binance futures interface is that there are two screaming green and red buttons.
The green button allows you to long while the red button is for shorting.
Other differences between the two markets aren’t too obvious and you will definitely confirm this after diversifying into futures.
Firstly, whenever you spend money in the spot market what you get is actual crypto that you can send to any wallet.
This is not the case in the futures market.
The futures market consists of perpetual contracts that are pegged to the prices of actual crypto assets in the spot markets.
As such, the most popular crypto futures contracts are paired with USD backed stablecoins because they (contracts) track the value of the pegged asset in dollars.
This means that when you enter a trade by buying a contract, what you get is not actual cryptocurrency. It’s just a contract.
For example, if you want to trade the BTCUSDT pair, you must have USDT balance in your futures account.
On Binance, though, you can trade futures contracts pegged to BUSD stablecoin in addition to USDT backed contracts.
But the icing on the cake is that you can use actual cryptocurrencies as a base asset on Binance futures.
These types of futures are known as BUSD-margined contracts and are settled in BUSD.
I have published an article on this topic and you can check it out below.
Beyond that, futures trading has cheaper order fees than spot (0.04% base fee vs 0.1% for spot on average) but it also charges funding fees every 8 hours.
In addition, futures trading happens on different order books than spot, and is thus more liquid.
Lastly, in futures, you can see the profit and loss of open positions in real time. This is not possible in the spot market.
Futures as a hedge
Hedging provides a practical way to protect the value of the coins held in your spot account and offline wallets.
Generally, the goal of hedging is to reduce the risk and protect your investment from large downside moves.
Just like every other financial market, the crypto market happens in cycles. These cycles cause bull and bear markets.
Bear markets are very brutal sometimes because the increased selling pressure can cause rapid price drops.
And while you could easily convert your crypto assets to dollars in anticipation of a bear market, this may not be the best idea, especially if you’re investing for the long-term.
As such, you need to find another way to protect your portfolio from risk, and this is where hedging comes in.
Crypto traders and investors can tap the power of futures to hedge against market downturns.
That said, it’s possible to fully hedge your crypto investment during a bear market by opening short positions in crypto futures.
For example, if you own Bitcoins, you can take a short position on the BTCUSDT pair to protect your investment from large downside moves.
Another way of hedging is to take short positions on Altcoins pairs that have a negative correlation with Bitcoin.
The only drawback with this hedging strategy is that it doesn’t generate profits. It only maintains a neutral exposure to your crypto assets.
There is also another hedging strategy that can be helpful to both traders and investors since it works in all market conditions.
But you have to be on Binance since it’s the only exchange that has the feature that makes it possible to implement the strategy.
If you have the standard Binance account, you’ll need to open a free futures account.
If you have never traded on Binance before, Click this link to register a free Binance Account.
By default, crypto futures exchanges allow trading in one way mode. This means that if you open a long position on BTCUSDT contract, you can’t short.
In other words, you can’t have a short position if you already have a long position.
But Binance Futures has a special feature which makes it possible to hold positions in both long and short directions at the same time under the same contract.
This feature is known as the Hedge Mode.
But this feature is usually switched off by default. So, you have to turn it on manually by following the steps below:
On Binance Futures interface, go to preference on the top right corner and click the ellipses (3 dots).
Then select Position Mode and turn on “Hedge Mode”.
That way, you can open both long and short positions at the same time on the same trading pair.
This allows you to fine tune your trades. Even if you’re not going to always have two sides open, it’s better to switch on hedge mode because it gives you better control.
I think it is worth mentioning that you can only adjust the position mode when there is no position or open orders. So, go ahead and turn on the feature because you’ll soon need it for hedging purposes.
Rookie traders might not recognize the usefulness of this feature but it can easily maximize returns in trending markets.
Generally, we hedge a trade with another trade.
The reason why we hedge positions this way is to:
- Secure and protect profits.
- For short-term gains.
For example, if you have a long BTCUSDT position that is in profit, you can either close it to secure those profits or wait for further upside at the expense of losing those gains to sudden market swings which are common in the crypto market.
However, if volatility starts and you’re convinced that there is still more room for further upside in the long-term, you can open a short position of equal amount to protect the gains in the long position.
Binance still offers another way of hedging which can be very effective during bull markets.
This strategy relies on Coin-Margined futures contracts that are now available on Binance alongside USD-margined Futures.
For simplicity’s sake, you can think of Coin-Margined contracts as more of a spot account integrated into futures as you can simply transfer eligible coins to your futures account and use them as collateral for trading futures.
What happens during a bull market is that the coins you transferred to the Coin-Margined futures account will continue accruing gains even if you don’t trade.
Coin-Margined futures further allow traders to confidently take advantage of shorting opportunities that sometimes occur during bull markets.
The idea here is that the short position will remain protected from unexpected losses since the collateral assets (which is actual crypto in this case) would accrue gains if the market started pumping unexpectedly.
Another good thing about Coin-Margined futures is that they fall in the same line of the usual perpetual contracts, which means you can still access leverage if you opt to go down this route.
Leverage
In crypto futures, leverage means borrowing funds from an exchange to use in a trade.
Leverage enables a trader to make larger trades than would be possible with the available capital.
This provides the opportunity to multiply profits, but it can also amplify losses.
The amount of funds available in your futures account is used as a multiplier to determine the amount of leverage you can get.
A multiplier of 2, for instance, would double the base figure.
For example, if you have $100 and use 5x leverage, the formula is as simple as multiplying 100 by 5.
That equals 500 and it means you can enter a position worth up to $500.
Currently, most reputable crypto exchanges offer leverage of up to 20x for new accounts.
Owing to the multiplier effect, you can use higher leverage to enter larger trades with the initial $100 capital that we mentioned in the earlier example.
As such, if you decide to go with up to 20x leverage with $100 as collateral, you’d be eligible to trade with $2000. Remember the formula multiplies the available collateral with the set leverage, which in this case is 20 x 100.
Though it might be enticing to borrow more with less capital, this is highly discouraged because the volatile nature of crypto markets increases the liquidation risk.
Liquidation is the feature that ensures that a trader cannot lose more than they have.
Let’s explain this with an example.
Suppose you have $100 and trading with 20x leverage. This means the trade is amplified by 20 times, i.e. $2000.
If the trade goes against you, you can lose $30, $60, $90, but before you get to a $100 loss, your trade will automatically be closed and the borrowed funds returned.
This is called liquidation and it means you’ve lost all your collateral.
Regardless of how much you borrowed, you can only lose what you provided as collateral and the crypto exchange will never allow a trader to go into debt.
That said, the simple way to avoid liquidation is to fund your account with enough collateral and to use low leverage.
Opening a large position with less collateral and high leverage reduces the distance between the trade and liquidation.
For example, if we have two traders called Joe and John.
Example A
Joe entered a $10,000 trade with $1000 collateral. This means he used x10 leverage.
Example B
John entered a $10,000 trade with a collateral of $100. In this case, John had to go with x100 leverage so as to be able to make such a trade.
In this scenario, the buffer that separates John’s trade with the liquidation point is 10 times smaller than the point at which Joe’s trade would be liquidated.
As you can see, using a small amount of collateral and high leverage to enter large trades is not a very good idea because it will get you liquidated faster.
The benefits of trading on Binance Futures
As we have seen, futures are more complex than spot trading. As such, beginners often experience problems getting acquainted with these products.
But the platform a trader chooses often makes a huge difference on how smooth their trading journey will be.
There are many platforms offering futures trading, but many experienced traders often recommend Binance.
What sets Binance apart is:
The platform has more complex trading tools, which are straightforward and easy to use.
We have already talked about the hedge mode — a feature that is unique to Binance and which allows you to open two trades of the same contract going different directions at once.
In other words, you can long and short the same coin at the same time, without either of the positions canceling the other.
For example, if you long ETH on Kucoin or Phemex and then discover a short opportunity, you’d have to first close the long so as to short.
However, a trader who is on Binance can keep both trades open, as long as the hedge mode is activated.
Beyond that Binance Futures has a huge list of trading pairs. I have counted more than 530 crypto-to-crypto trading pairs, which include DeFi tokens and memecoins.
Binance Futures also has a vast number of users, north of 28.6 million. This translates to high trading volumes in the platform which means there is always adequate liquidity to enter and exit trades effectively.
In terms of trading fees, maker/taker fees can go as low as 0.000%/0.017%, and these fees can be slashed even further by simply holding BUSD or BNB. Check this article to learn how to get discounts by holding BUSD or BNB.
In addition, the platform has implemented multiple security features such as multi-factor authentication and Anti-Phishing Code. There is even a $300 million Insurance Fund that protects bankrupt traders from adverse losses and ensures that profits of winning traders are paid out in full.
Lastly, traders can switch up to 17 different languages and the platform has an easy-to-use user interface combined with advanced tools that you need to become a winning trader.
I have published a comprehensive beginner’s guide on how to trade futures on Binance. Please check out the post below.
Final Thoughts
Some people are against futures trading and they will out rightly tell you it’s a bad idea.
Personally, I think such advice comes from people who failed to implement proper risk management which cost them all the profits they made during the bull market.
Risk management is mostly ignored during bull markets because people develop the illusion that coins will never stop pumping.
And as we all know, everyone’s an expert trader during a bull market. But the real test comes when the market goes back to normal.
The state of the crypto market during the first quarter of 2022 is a perfect example that the market cannot keep pumping forever.
But even in this situation, traders who have been using proper risk management strategies are still making money.
This is something to think about if you want to become a consistent trader and a profitable investor.
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Disclaimer: This article is meant for educational purposes only and should not be construed as investment advice.
Disclosure: I only recommend products I use myself and all opinions expressed here are my own. This post contains affiliate links. If you use these links to buy crypto assets, you will get a discount and we may earn a commission.
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