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Futures contracts are a type of derivative trading instrument in the financial markets. During this type of contract, there is an agreement with a definite and legal boundary in which the parties are required to buy and sell an underlying asset on a specific date at an agreed price. The duration of futures transactions is determined based on a certain time in the future;
In fact, at the best time of futures trading, the purchase and sale of the agreed asset is done at a predetermined price. In fact, in this type of transaction, you will be able to bet or predict the price of a currency, and by executing a transaction in the present, you will receive it in the future.
Since these transactions depend on price changes and fluctuations over time, price increases and decreases in a certain period of time in the future indicate people’s profit or loss, and it can be said that the risks of futures are higher than other transactions and for people with less experience in financial markets. Not recommended.
For many people who are curious about the ruling of futures transactions, it can be said that the Shariah ruling of digital currency futures transactions, considering that it has gambling properties, is considered haram from the point of view of most authorities. However, knowing the risks of futures and the method of trading futures will help you earn big profits, which I have explained below.
What is futures trading?
Futures contracts are one of the most popular forms of trading in the world of online financial markets, where traders buy and sell assets in the present and deliver them to buyers in the future. Anything can be traded in futures transactions; including commodities, securities, digital currency such as buying bitcoins, forex market assets and… . Of course, these types of transactions often happen in derivatives of the cryptocurrency market and are considered a part of it.
This method is a kind of speculation in the price of assets without having their real ownership. Currently, Bitcoin futures transactions are among the most popular digital currency futures contracts. Most institutional investors are players in the futures trading arena; But the presence of a single trader in this game is not far from the mind.
The surprise and unique feature of futures trading is that you will be able to receive profit from the asset that you have not yet acquired, just by an agreement between the buyer and the seller. In futures transactions, the process of checking the market and observing the precautionary aspects is the same as the process in normal transactions;
But the risk and dangers of futures are high because it is based on guesses and predictions.
In simpler terms, in futures transactions, the contracting parties agree on an asset at a certain price at a certain time in the future. With this method, you predict the price of a digital currency or asset in the future and enter into a purchase and sale transaction without having that asset.
If the forecast is correct, you will receive profit from the market at the specified time and otherwise you will be required to pay the agreed price to the other party.
How does digital currency futures trading work?
Here, some people may ask the question, what is futures trading in forex or what is it like in the digital currency market? In response, I must say that if you observe the method of futures transactions in a digital currency exchange, you will not be able to distinguish it from normal transactions. The reason is that traders do the same things in both of these transactions;
They open buy or long and sell or short positions and implement correct financial risk management techniques.
However, due to the fact that futures contracts operate with the price action of the asset and not with it, it is very different from spot transactions.
Managing digital currency futures transactions is much easier and more fluid due to not having real assets at your disposal. Also, such contracts provide the possibility of doing margin transactions with high leverage. In the agreement between the buyer and the seller of digital currency, the delivery date and the price of the cryptocurrency are predetermined, and in fact, a kind of bet is made on future price movements.
Read more: What is leverage in digital currency?
For example, if a person’s prediction of the price of Bitcoin indicates that it will increase by the end of the month, he should open a long position through a digital currency futures transaction with a maturity date of one month. If the price is expected to decrease, one should open a short position. During the futures trading period and when the maturity date is reached, the contract will be closed.
Read more: Bitcoin price depends on what factors?!
Types of digital currency futures trading
Traders have the option of choosing futures contracts from among several types of transactions. Since not all platforms can offer all types of futures trading, you should be careful when choosing a futures exchange.
Standard futures contracts
Normal futures transactions include all aspects of a standard futures contract from traditional markets such as maturity date and expiration. In December 2017, Chicago-based CME Group and CBOE launched Bitcoin Futures as the first futures exchange.
This incident can be considered as one of the main reasons for the growth of the price of Bitcoin to its historical peak on that date. Today, the CME exchange offers several Bitcoin futures deals with different expiration dates, which can be seen in the Bitcoin Futures Calendar section.
All contracts are settled in USD on the maturity date. Of course, the CBOE has removed the Bitcoin futures contract; But as interest in the cryptocurrency space improves, these bonds will make a comeback.
On the other hand, some digital currency exchanges have also provided the possibility of conducting standard futures transactions for their users. Most of these exchanges, such as Binance, have seasonal bitcoin futures and their settlement is done by American dollars. These futures trades are usually settled every 3 months and are ideal for making swing trades.
Future contract with physical delivery
Another type of digital currency futures with an expiration date is physical delivery futures. For the first time, these futures transactions were introduced by the Bakkt exchange. This entity is sponsored by Intercontinental Exchange, the parent company of the New York Stock Exchange ( NYSE ). The difference between this digital currency future transaction and standard futures transactions is the delivery of digital currency during the settlement process.
Bakkt exchange is only able to offer Bitcoin futures transaction with physical delivery; It means that on the expiration date, it will send bitcoins to the buyer. In fact, the purpose of this type of futures transactions with cash settlement is to participate in the circulation cycle of Bitcoin.
Frequent contracts
Another type of futures trading is perpetual contracts or futures without maturity. This type of digital currency future contract has no expiration date and is used in large exchanges such as Binance. Funding rate is one of the main mechanisms to keep the price of futures contracts close to the spot price.
Traders pay commissions to each other according to their position in certain hours. The party paying the fee is actually determined based on the difference between the digital currency futures transaction price and the spot market price. Therefore, when the funding rate is positive, longs are required to pay commission to shorts, and when it is negative, shorts will pay commission to longs.
In permanent future contracts, the important thing about the funding rate for traders is that this rate is paid every 8 hours and is traded based on stable coins such as Tether (USDT).
Advantages of futures contracts
Futures contracts have various advantages, the most important of which are mentioned below:
risk management
Investors and companies can significantly reduce market risk by using futures transactions and can prevent possible frauds.
Bilateral transactions
In futures transactions, it is possible to buy and sell assets in both directions of the market. This feature has made it possible for users to profit from the market in any situation.
Determining property value
In the futures market, the price of a cryptocurrency or asset is predetermined, and none of the parties to the transaction can distort it at the time of maturity.
Disadvantages of futures transactions or futures contracts
In addition to the benefits mentioned about futures, the risks of futures cannot be ignored:
liquefy
Some investors make a big mistake by putting their entire capital into the market or using borrowed money and digital currency loans . In this situation, if the person’s prediction is not correct, all his capital will be lost. Therefore, it is better to never make this mistake with the greed of acquiring wealth.
Margin and leverage
Leverage and margin can be compared to a double-edged sword that can increase your profit or loss. The wrong use of these features will completely destroy your capital.
Terminology of the futures trading market
In order to better understand the futures trading market and how to trade in it, it is very useful to know the following terms:
Leverage or lever
One of the attractive features of futures trading is the possibility of using leverage. By using leverage, you will be able to significantly increase your profit.
The amount of leverage is also different depending on the type of exchange or broker you choose.
Margin or initial capital
To enter into a transaction, traders need an initial capital that they use as collateral. It should be noted that in case of incorrect prediction and the capital reaches a certain number, the transaction will be closed automatically and your capital will be lost. In the financial market, this event is referred to as liquidation or call margin.
Long position
When the trader enters a trade in the direction of the market going up, the term long position or purchase is used.
Short position
When a trader enters into a transaction in the direction of market decline, it is said that he has opened a short or selling position.
PNL
PNL PNL represents the trader’s profit in a transaction.
Tick Profit
Tick profit means the profit limit specified by you for your trade.
stop loss
Stop loss or loss limit determines your level of risk in trading. Immediately after the price crosses the loss limit, your transaction will be closed.
One of the most important uses of futures trading is to earn more from market fluctuations and profit from the market without owning assets.
Futures contracts are suitable for traders who have sufficient capital, high risk tolerance, experience and skills, are familiar with technical analysis and fundamental analysis , and are proficient in trading psychology, capital management, etc.
