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Futures traders in cryptocurrencies like to use a lot of leverage to make "ape" and "degen" bets, but most traders make these three big mistakes. Read about the practical ways to scale in Bitcoin if you are planning to invest in it.
A lot of traders say a lot of very wrong things about trading bitcoin futures. This is not normal in the financial world, but it often happens on derivatives exchanges. Most people make mistakes in three areas: how prices on futures markets are not linked, how fees work, and how liquidations affect derivatives instruments.
Let's look at three common mistakes and misunderstandings traders of crypto futures should try to avoid.
Spot trading and derivatives contracts are priced and traded in different ways.
Open futures contracts are worth more than $25 billion on the cryptocurrency market right now. These products are used to grow crypto positions by new traders and fund managers with a lot of experience.
Unlike what most people think, futures contracts and other types of derivatives are usually used to either lower the risk of an event or increase the amount of exposure to it. But they are not meant to be used in ways against the law, like gambling.
Contracts for crypto derivatives don't always consider all-important price and trade changes. You should consider these differences if you want to trade on the futures market. Even investors with a lot of experience with traditional assets can make mistakes with derivatives. You should have a good idea of how things work now before you use leverage.
Even though they may show USD rates, most crypto trading companies don't trade in US dollars. This is a big secret risk that derivatives traders have to take. Because of this, when trading on and learning about futures markets, there are more chances of additional risks and distortions.
In discounted futures contracts, there are a lot of clauses that come as a surprise.
On September 9, contracts for Ether (ETH) that expire on December 30 are sold for $22. This is 1.3% less than Coinbase and Kraken offer for spot trades. The Ethereum Merge is different because it could split into new currencies. People who buy the derivatives contract won't be able to get any of the free coins that may be given to people who already have Ether.
But this is not the only reason for decoupling since each exchange has its risks and pricing system. Futures prices could also go down if people who bought derivatives contracts don't get the prize. For example, the price of Polkadot quarterly futures on Binance and OKX has been lower than that of Polkadot (DOT) on spot exchanges.
Binance Polkadot (DOT) quarterly futures premium. TradingView was a source that was used.
The futures contract was sold at a discount of 1.5% to 4% from May to August. This backwardation shows that buyers of leverage are not meeting their obligations because there is no demand. But this pattern has been going on for a long time, and Polkadot's stock went up 40% between July 26 and August 12, so it's possible that something outside of the company is to blame.
Fees should go up, and prices should differ from one another.
Imagine an investor putting up $100 and borrowing 20 times that amount to buy $2,000 worth of Bitcoin (BTC) futures.
Even though futures trading costs are usually lower than spot trading, a hypothetical fee of 0.05% is added to the $2,000 transaction amount. So, entering and leaving the position once will cost four dollars, equal to four percent of the initial deposit. Even though that may not seem like much, a toll like that becomes more and more critical as the turnover rate goes up.
Traders may know that using a futures instrument comes with extra costs and benefits. But when the market isn't stable, it's more likely that something new will happen. Most of the time, liquidations are to blame for the difference between the derivatives contract and the spot market.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.