After the market crash due to Covid-19, there has been a huge surge in popularity for cryptocurrency futures. Speculators have tried to capitalize on the volatility of both price and volume. Ahead of the Covid-19 pandemic, the range of available markets has expanded significantly despite mediocre trading volumes.
After cut in twice and having and increasing the volatility of BTC, the types of contracts (futures) offered, as well as a wider range of trading opportunities, have led to an increase in the popularity of Bitcoin futures. The current volume of Bitcoin futures transactions is still higher than the volume of spot transactions. This indicates that the market capitalization is likely to increase several times more. The development of cryptocurrency futures phenomenally increases the value of individual cryptocurrencies and contributes significantly to the growth of the market necessary to position digital assets as an excellent analogue of traditional assets.
At the moment, futures trading is viewed by many experts as a development that finally attracts institutional investors to the world of cryptocurrencies. One of the most coveted dreams of cryptocurrency enthusiast investors is coming true.
What derivatives are there?
There are four main types of derivatives: futures, forwards, swaps and options.
Futures and forwards are similar types of contracts with minor differences. So, futures obligating the buyer to buy an asset at a pre-agreed price on a certain date in the future. As for forwards, this type of contract is more flexible and customizable to the needs of both parties. Since forwards are usually traded on over the counter (OTC) markets, counterparty risks are always taken into account.
Options give the buyer the right to buy or sell the underlying asset at a specified price. However, according to the terms of the contract, it is not necessary to buy the asset, which is the key difference between options and futures.
Swaps are contracts that are used between two parties to exchange one type of cash flow for another (for example, BTC for ETH). In fact, this is an open-ended contract that allows you to hold a position from several minutes to a year.
What are cryptocurrency futures?
The concept of a derivatives (futures) market only gained popularity in the 1970s, when financial markets faced increased risk following the abandonment of the gold standard in America.
In December 2017, the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) launched Bitcoin futures almost simultaneously with the cryptocurrency market peaking. Its complexity has increased because of the futures. However, the availability of various financial instruments continues to increase the market’s popularity over traditional counterparts, contributing to the expansion of the use of cryptocurrencies.
Cryptocurrency futures work like typical futures contracts. Digital coins are simply hedged assets. The seller undertakes to deliver the cryptocurrency asset to the buyer at an agreed price and within a specified period.
Futures contracts are popular because traders can speculate on cryptocurrency prices without owning assets, as they “gamble” on the future value of the cryptocurrency. Trading in futures does not require ownership of assets, therefore, the amount of complexity associated with trading cryptocurrencies is reduced.
Risk management is the primary concern of futures as they stabilize returns in volatile markets. The volatility of cryptocurrency assets is great for futures, as investors can minimize their risks while making good long-term returns.
Cryptocurrency futures and risk premiums
The main function of futures is to fix futures prices at a competitive rate through leverage speculation, which generates large profits (or losses). The success or failure of a futures contract depends on a variety of internal and external factors. The main factors affecting the price of a certain cryptocurrency are:
- Supply and market demand for it.
- Mining costs.
- The number of rewards that validators receive for adding transactions to the blockchain.
- Number of competing cryptocurrencies.
- The exchanges on which it is traded.
- Internal management and its development.
One of the fundamental components of a futures contract that determines its success is the risk premium.
The risk premium is the additional income that an investor can receive after accepting the additional risk. It is defined as the difference in value between the spot price at a future date and the price of a futures contract that is due on the same date. Depending on whether the placement is positive or negative to the spot price, the futures price can be defined as contago or backwardation. Contago and backwardation provide an insight into speculative predictions of future asset prices, as well as arbitrage opportunities.
- Contago – an increase in the spot price of an asset over time.
- Backwardation – a fall in the spot price of an asset over time.
The example of the profitable use of futures in the cryptocurrency market is the market crash due to Covid-19 in March 2020, when the world was not aware of how the virus would affect the markets. On February 12, 2020, a number of futures markets went into extreme contago, announcing risk premiums in excess of $ 500 per coin. Thereafter, the Bitcoin spot price peaked at just under $ 10,500 before the downturn began. Literally a month later, on March 12, 2020, the BTC price began to fall rapidly, and the price of futures contracts began to rise. Their growth was about 20%. Later, the price of bitcoin reached a peak low (just under $ 5,000) and only then began to recover. This was partly due to the significant takeover of Bitcoin futures by large investors.
Are there any disadvantages of trading cryptocurrency futures?
When it comes to cryptocurrency futures, the biggest drawback to face is volatility. Prices can rise and fall at too high a rate, which can lead to the loss of most of the investment. The rest of the disadvantages of cryptocurrency derivatives are almost invisible.
The cryptocurrency futures market is very complex, making it difficult for inexperienced investors to navigate it. A beginner’s mistakes can be fatal to his investment, and the unpredictability of cryptocurrency futures greatly increases the likelihood that something will go wrong. That is why it is worth working with the derivatives market for experienced investors, especially cryptocurrency investors.
It is also worth paying close attention to regulation. Regulators in different countries are wary of crypto futures and other types of such derivatives – as well as of the cryptocurrencies themselves. The US Securities and Exchange Commission (SEC) is closely monitoring the situation on the cryptocurrency market and has already managed to fine some organizations.
Influence of futures on the price of TON Crystal (Free TON)
TON Crystal futures often fluctuate between the two positions that were mentioned before, an extreme values recorded multiple times since the start of TON Crystal trading. Contago and backwardation allowed speculators to more accurately identify trends in the value of TON Crystal and get maximum profit.
The TON Crystal futures market, operating in Contago, offers large players incentives to sell futures contracts in order to hedge risks and lock in future asset values. When the market goes into extreme contago, the motivation for selling futures increases dramatically, especially for those investors who have significant amounts of TON Crystal. Speculators are one of the few buyers of futures, and this is what reduces the volatility of TON Crystal.
High volatility occurs when speculators are aggressively trading short positions or when there is an aggressive downturn in the futures or spot market, which results in a contago reversal. The backwardation market provides large investors with the opportunity to buy futures contracts at a discount for increased profits. Since futures are of low value in such a situation, investors sell their assets on the spot market and buy futures at a discount to preserve their investment.
From a long-term perspective, the introduction of the Free TON (TON Crystal) futures market has practically no effect on the price – since in the long term, the cost is determined by fundamental factors (popularity in the cryptocurrency community, use cases, etc.). However, futures improve the integrity of the market by limiting volatility and providing better liquidity for institutional participants.
Futures enable investors to analyze the Free TON (TON Crystal) market, which allows them to more effectively identify market sentiment and act accordingly. The introduction of TON Crystal futures into the market was a positive step that only solidified the asset’s financial base. Due to the increase in market capitalization and trading volume, investors began to treat Free TON futures in the same way as traditional futures. This attracts more and more interest in Free TON and contributes to the formation of TON Crystal as a strong investment asset.
Despite the large impact of volatility on the pricing of futures, futures trading remains a preoccupation of major players. Nevertheless, futures trading continues to generate interest as this volatility and uncertainty allows for more profits than usual. The popularity of cryptocurrency futures is growing from year to year, which is a positive signal for investors.
Bitcoin is a big part of the digital asset market. TON Crystal is a promising cryptocurrency, which in the future may also have high volatility. BTC and TON Crystal futures provide investors with transparency, investment security and risk management capabilities. Moreover, futures allow individual market participants to access the BTC and TON Crystal market (in countries where this is prohibited), as well as hedge any direct risks associated with changes in coin prices.