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Crypto Futures Trading: How to Long and Short Cryptocurrencies

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Has the volatility of cryptocurrency prices made you want more than simple spot trading? Do you consider the process of buying and selling actual cryptos too burdensome? You have probably already heard of crypto futures trading, as volatile assets tend to be very popular for this type of trade, but you may not be completely sure what it entails. Alternatively, maybe you’ve heard of “long” and “short” crypto trades, which sound pretty complicated at first, but are actually really useful types of trades that let you profit from the price movements of an asset without ever having to hold the asset yourself.

But first, what do all of these terms mean?

Futures Trading

Futures — regardless of the asset type — are a type of derivative financial contract “that obligates the parties to transact an asset at a predetermined future date and price,” states Investopedia. In other words, I need an asset (for example ten sacks of wheat) in three months, but I’m much more comfortable with its current price as it might rise until the time I need it. I make a deal with a trader that I will buy that amount for the current price once the contract expires, which is in three months. The contract is then locked in, while I need to pay only a fraction of the actual worth (the initial margin, deposited with the broker).

The trader selling the wheat to me has the incentive of a guaranteed purchase: futures give the holder the obligation of a purchase (options only give that option, but that is a different topic). If for any reason, I want out of the deal, I am free to sell the contract to someone else, but then that person will have to purchase the wheat that I initially agreed to. For me, if the price of wheat rises by the time the contract expires, I have effectively saved a certain amount of money by purchasing earlier—or, if I sell the contract, I’ve earned that money. But if the price falls, I am still obliged to spend the original amount—and if I sell the contract, I have to take a net loss amounting to the difference.

Crypto Futures Trading

This leads us to the next part: long and short positions, also known as cryptocurrency futures trading. Futures contracts let traders speculate on the price of an asset at a point in the future. If they believe the price will rise, they can sell the contract at that point and profit from the difference. This is called a long position and seems like the most intuitive approach to speculation. After all, how would you profit from the price falling?

However, this is also very much possible, but the process may not be as clear. If the price is falling, a trader who bet on that outcome—in other words, a trader holding a short position—will take what’s called an offsetting position to close the contract. An offsetting transaction lets the trader close their position without the consent of other parties involved. Much more likely, however, is that the trader is selling instead of buying, meaning they sell at the current price when the asset becomes cheaper.

How to Long and Short Cryptocurrencies

Our definitions, up until now, were applicable both to legacy finance and to the cryptocurrency industry as a whole, thanks to the similarities between the assets. Every cryptocurrency exchange that offers futures trading will work in the same way, aside from some basic UI differences. In other words, as long as you understand the logic behind the process, you can trade crypto futures wherever you want.

In order to short a cryptocurrency asset, you are effectively entering into a contract promising to sell a certain amount of the asset at a predetermined point in the future. As the futures contract locks in the current price, you hope the price falls, so you’re selling at this price at a point where buying back the asset is cheaper, which means you’re profiting.

Conversely, longing a crypto asset means you make a deal to buy a certain amount at the current price sometime in the future. This time, you want the price to increase, so you have more in value than what you paid for.

The best place to trade crypto futures

Every exchange offering futures trading will have a section with detailed explanations of the process they’re using for traders interested in learning more. Of course, this becomes much easier when you’re already familiar with the basics.

One of the best exchanges to trade cryptocurrency futures and other crypto derivatives is Singapore-based Bityard exchange. It lets you long and short cryptocurrencies with leverage, make spot trades, copy trade other traders, and much more - all with some of the lowest trading fees in the market!