Particularly when it comes to trading crypto futures on derivatives exchanges outside the world of traditional finance, many traders frequently voice some very significant misconceptions. The most frequent errors concern fees, the effect of liquidations on the derivatives instrument, and the price decoupling of futures markets. These are the common Mistakes in Trading Crypto Futures that everyone makes
Let’s examine three common blunders and myths that traders should steer clear of when dealing in crypto futures.
Spot trading and derivatives contracts have different pricing and trading structures
Retail traders and seasoned fund managers utilize these instruments to leverage their crypto positions, and the total open interest in futures contracts in the cryptocurrency market already exceeds $25 billion.
Contrary to popular belief, futures contracts and other derivatives frequently used to lower risk or expand exposure rather than for irrational gambling.
In crypto derivatives contracts, some discrepancies in pricing and trading sometimes overlooked. Trading in futures markets should therefore at the very least take these disparities into account. Even experienced investors in traditional assets who use derivatives are prone to making mistakes, therefore it’s critical to comprehend the unique characteristics before utilizing leverage.
Mistakes in Trading Crypto Futures
Even though they offer USD rates, the majority of cryptocurrency trading firms do not really employ US money. This is a significant unreported fact that puts derivatives traders at risk and one of the problems that they encounter when researching and trading futures markets.
Clients don’t really know if the contracts are priced in stablecoin because there is a serious lack of transparency in the market. However, given that using centralized exchanges always carries the intermediate risk, this shouldn’t be a huge worry.
Discounted futures occasionally unexpected
On September 9, spot exchanges like Coinbase and Kraken began trading ETH futures that mature on December 30 for $22, which is 1.3% less than the current price. The distinction results from the possibility of Merge fork coins during the Ethereum Merge. No free coins that Ether holders might receive will be given to the derivatives contract’s buyers.
Since holders of derivatives contracts won’t receive the prize, airdrops can also result in lower futures prices, although there are other reasons for a decoupling since each exchange has its own pricing structure and hazards.
For instance, Polkadot quarterly futures on Binance and OKX have been trading cheaper than the spot exchange price for Polkadot (DOT).
Keep in mind that between May and August, the futures contract traded at a 1.5% to 4% discount. This backwardation reveals a lack of demand from purchasers using leverage. However, given the persistent trend and the fact that Polkadot rose 40% from July 26 to August 12, it is likely that outside forces are at work.
When using quarterly markets, traders must adapt their targets and entry levels because the futures contract price has become independent of spot exchanges.
Increased costs and price decoupling should be taken into account
Leverage, or the capacity to trade sums greater than the initial deposit, is the main advantage of futures contracts.
Let’s take the example of an investor who deposits $100 and purchases Bitcoin (BTC) futures worth $2,000 utilizing 20x leverage.
Even though trading costs for derivatives contracts are typically lower than those for spot securities, a hypothetical 0.05% fee is nevertheless imposed on the $2,000 transaction. As a result, the cost of entering and leaving the position once will be $4.00, or 4% of the initial investment. Although it might not seem like much, the cost grows as the turnover rises.
Even if traders are aware of the additional expenses and advantages of employing a futures instrument, an unknown component usually only surfaces during erratic market conditions. Liquidations are typically the source of decoupling between the derivatives contract and the ordinary spot exchanges.
The derivatives exchange has a built-in mechanism that terminates the position when a trader’s collateral stops being enough to cover the risk. This mechanism of liquidation could result in abrupt price changes and a resulting decoupling from the index price.
Mistakes in Trading Crypto Futures
Even if these inaccuracies won’t lead to more liquidations, uneducated investors may respond to price changes that only occurred in the derivatives contract. To be clear, the derivatives exchanges get the reference index price from external pricing sources, typically from conventional spot markets.
There is nothing wrong with these distinct procedures, but before utilizing leverage, all traders should think about their influence. Trading on futures markets requires consideration of price decoupling, greater costs, and liquidation impact.
Every trading and investing decision has some risk. When selecting a choice, you should do your own study.
Other Common Mistakes While Trading Crypto Futures
Making Choices Driven by FOMO
The phrase “FOMO” (Fear of Missing Out) refers to the anxiety associated with passing up an opportunity. For instance, FOMO might tempt you to take advantage of an investing opportunity that seems too good to be true. This, however, can result in hasty choices that are not in your best interests.
Everyone can benefit from being aware of FOMO whether they’re considering investing in cryptocurrencies or making any other financial decision, even though some people are more likely than others to make reckless judgments.
Research is the first thing you should do before you start trading cryptocurrencies. Study the market, the coin you plan to use, its value, and the exchange you plan to use. You’ll be more equipped to make a wise investment choice the more knowledge you have about a specific cryptocurrency.
Remember that successful investments don’t solely depend on chance or speculation. They demand a detailed examination of each component of an asset. This indicates that the biggest error consumers make when purchasing cryptocurrency is not conducting enough research.
Trading on Bias and Emotions
The two key elements that might result in poor decision-making are prejudice and emotions. While biases lead you to base decisions on prior experiences rather than the available knowledge, emotions might lead you to act impulsively.
Additionally, you might be tempted to trade in accordance with your emotions, which is never a smart move. Your feelings may be telling you that something will rise or fall, but the market may disagree and ultimately go in the opposite direction from what you believe it should.
When people learn this has occurred more than once in their trading history, it might send them down a rabbit hole of terrible trading practices.
Unfollowing Your Trades
One of the most crucial things you can do while trading cryptocurrencies is to keep track of your trades. This is because it enables you to spot patterns and trends, which will enable you to decide whether to purchase or sell with greater knowledge.
You can keep track of your trades in a few different methods, such as by using a platform, spreadsheet, bot, or cryptocurrency trading app. Depending on the type of trader you are and how much time and effort you are willing to put into monitoring activity, you can decide which strategy is best for you.
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