How cryptocurrency futures work on an exchange

Cryptocurrency futures are contracts to buy or sell cryptocurrency at a predetermined price on a specific date in the future. They allow traders to protect their investments from the risk of price volatility and profit from changes in cryptocurrency prices. Cryptocurrency futures operate on exchanges (see a cryptocurrency exchange ranking here), where trades take place for cryptocurrency buy or sell contracts.

How they work

Futures contracts can be of two types: long and short. Long contracts allow traders to buy cryptocurrency at a predetermined price in the future, while short contracts allow them to sell cryptocurrency at a predetermined price in the future. Cryptocurrency futures contracts typically have a lifespan of several days to several months.

Traders can use cryptocurrency futures to protect their investments from the risk of price volatility. For example, if a trader bought Bitcoin at $10,000 and fears that the price might fall, he can buy a long $10,000 contract on a futures exchange. If the price of Bitcoin falls, the trader profits from the contract, which compensates for the losses resulting from the fall in the price of Bitcoin. You can check this after registering on the Bitfinex exchange.

Risks

Cryptocurrency futures are not risk-free instruments. They can be highly volatile and prone to drawdown risk. Traders can lose money if cryptocurrency prices fall sharply or if futures contracts are closed against them.

Traders can also face liquidity risk when no one wants to buy or sell futures contracts. This may result in traders being unable to close their positions or unable to sell their contracts at the desired price.

In addition, cryptocurrency futures can be subject to manipulation by large market players who can use their resources to change cryptocurrency prices in their favor.

Conclusion

Cryptocurrency futures are a useful tool for protecting investments and profiting from changes in cryptocurrency prices. However, they are not risk-free instruments and can result in the loss of money. Traders should understand the risks associated with cryptocurrency futures and use them with caution.