3 major mistakes to avoid when trading cryptocurrency futures markets

A lot of traders have misconceptions about trading cryptocurrency futures. This is especially true for derivatives exchanges that are not within the traditional financial realm. Most common errors are price decoupling, fees, and the effect of liquidations on derivatives instruments.

Let’s look at three common mistakes and misconceptions traders should avoid when trading cryptocurrency futures.

In terms of pricing and trading, derivatives contracts are different from spot trading.

The crypto market has an aggregate futures open interest of more than $25 billion. Retail traders and fund managers are both familiar with these instruments and use them to leverage their crypto positions.

Futures contracts and other derivatives can be used to reduce or increase risk. However, they are not meant for degenerate gambling.

In crypto derivatives contracts, there are often differences in trading and pricing. These differences should be considered by traders when trading in futures markets. Even the most experienced derivatives investors with traditional assets can make mistakes so it is important to be familiar with existing peculiarities before you use leverage.

Even though they may display USD quotes, most crypto trading platforms do not use U.S. Dollars. This is an untold truth that can cause additional distortions and risks for futures traders.

Lack of transparency is a major problem. Clients don’t know if contracts are priced in stablecoin. This should not be a problem, as there is always an intermediary risk when trading on centralized exchanges.

Sometimes, discounted futures come with unexpected surprises

The price of Ether (ETH), futures maturing on December 30, was $22 or 1.3% lower than the current spot exchange price. This difference is due to the possibility of merging fork coins during the Ethereum merger. The potential free coins that Ether holders might receive will not be given to buyers of the derivatives contract.

Airdrops can cause futures prices to drop as the holders of a derivatives contracts will not be awarded the award. However, that is not the only reason for a decoupling because each exchange has its own pricing mechanisms and risks. The Polkadot quarterly options on Binance and OKX were trading at a discount against the spot price.

Quarterly futures premium for Binance Polkadot, DOT Source: TradingView

You can see that the futures contract traded at a discount of 1.5% to 4.4% between May and August. This shows that there is not enough demand from leverage buyers. Considering the long-lasting trend, and the fact that Polkadot rose 40% between July 26th and Aug. 12, it is likely that external factors are at play.

Futures contracts are now more expensive than spot exchanges. Traders must adjust their entry and target levels when using quarterly markets.

Consider higher fees and price decoupling.

Leverage is the core benefit of futures contract, which allows you to trade larger amounts than your initial deposit (collateral and margin).

Consider a situation where an investor deposits $100 and purchases (long-term) $2,000 worth of Bitcoin futures using 20x leverage.

Although trading fees for derivatives contracts are generally lower than spot markers, the hypothetical fee of 0.05% applies to the $2,000 trade. The cost of entering and exiting a position once will be $4. This is equal to 4% of the initial deposit. Although it may not seem like much, this toll increases as turnover increases.

Although traders may be aware of the potential benefits and additional costs associated with futures instruments, they are often unaware of an unknown component that can arise in volatile market conditions. Liquidations are usually responsible for a decoupling of the derivatives contract from the regular spot exchanges.

The built-in mechanism of a derivatives exchange closes a position if the trader’s collateral is not sufficient to cover the risk. This liquidation mechanism can cause extreme price movements and consequent decoupling with the index price.

These distortions won’t cause any additional liquidations but uninformed investors may react to price fluctuations only in the derivatives contract. The reference index price is calculated by the derivatives exchanges using external pricing sources (mostly from regular spot markets).

These unique processes are fine. However, traders must consider the impact of leverage before they use it. When trading futures markets, it is important to consider the impact of price decoupling and higher fees as well as liquidation.

Risk is inherent in every investment or trading move. Before making any investment or trading move, you should do your research.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of topmagazinewire.com with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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