WHY CRYPTO HOLDERS SHOULD CONSIDER TRADING FUTURES ON BINANCE FUTURES

10 min readMar 23, 2022

23/03/2022

By Damilola Ogungbayi olushola

Table of Contents

The difference between spot and futures
Futures as a hedge
Market-neutral trading strategies
Leverage
The benefits of trading futures on Binance Futures

One does not simply become the leading crypto exchange overnight. Instead, an empire is built one day at a time. Binance has climbed up the ladder to offer traders many financial products that will get them closer to achieving their goals

With Binance, traders have a vast array of options when it comes to trading. The leading platform not only offers spot trading, but users also have the choice to engage in margin, options, and futures trading 24/7.

Buying and selling cryptocurrencies has never been more accessible than it is today.

DIFFERENCE BETWEEN SPOT AND FUTURES

Spot markets offer a variety of digital assets for traders to buy and hold while futures markets give traders the opportunity to benefit from small price fluctuations in any direction.

As a rule of thumb, a spot market is where commodities, currencies, stocks, and bonds are traded with instantaneous delivery. In contrast, a futures market settles the delivery of its underlying assets and futures contracts on a predetermined future date.

Spot and futures markets are essential ecosystems for traditional financial assets and these markets play an equally important role for cryptocurrencies.

Here, you will understand what the main differences are between trading in these two markets.

1.Leverage

Traders are drawn to the futures market because of leverage. Leverage makes futures trading extremely capital-efficient. For instance, to purchase 1 BTC in the spot market, you would need thousands of dollars — $50,000 based on the prevailing market rate. With a futures contract, you can open a BTC futures position at a fraction of the cost. This is only possible with the use of leverage. The higher the leverage, the less you need to spend on a position. In contrast, spot trading does not offer leverage. Suppose you have only USDT 5,000 available. In this case, you could only afford to purchase USDT 5,000 worth of Bitcoin.

2. Flexibility to Long or Short

When you purchase Bitcoin in the spot markets, you make a profit only if prices go up. However, in the bear market, you can’t make money. Futures contracts allow you to profit from short-term price movements regardless of direction. Even when the price of Bitcoin falls, you can participate in the downward move and trade along with the momentum. With futures contracts, traders can develop sophisticated trading strategies such as short-selling, arbitrage, pairs trading, and many more. Additionally, futures contracts are also used to hedge against downside risk and protect a portfolio from extreme price volatility. Miners and long-term holders often use futures contracts to protect their portfolios from unexpected risks.

3. Liquidity

The futures markets offer deep liquidity with trillions in monthly volume. For example, the Bitcoin futures market sees an average monthly turnover of $2 trillion, far greater than the Bitcoin spot markets’ trading volumes. Its robust liquidity supports the process of price discovery and allows traders to transact in the market swiftly and efficiently. A liquid market is generally associated with less risk because there is always someone willing to take the other side of a given position, and traders will incur less slippage.

4. Futures vs. Spot prices

The price of a cryptocurrency on the spot market is the ruling price for all spot transactions, and this is known as the spot price. Buyers and sellers determine crypto spot prices through an economic process of supply and demand. In contrast, the futures price is based on its prevailing spot price plus the cost of carry during the interim before delivery. The basis represents the cost of carry of a futures contract. The basis can be a positive or negative number. A positive basis relationship means that the futures price trades higher than its spot price and vice versa. The basis may fluctuate because of changes in supply and demand, but due to the forces of arbitrage, it will eventually go to zero on the expiration day.

FUTURES AS A HEDGE

Futures trading is one of the best options for anyone who loves cryptocurrencies. Derivatives contracts represent the value of a specific asset that traders can buy or sell at a predetermined price at a specified time in the future.

Many traders use futures trading as a hedge against spot markets. Derivatives contracts can be sold high and bought low to profit from the price difference, making market-neutral trading strategies possible. With futures trading, there is no need to worry about cryptos being bullish, bearish or stagnant because of the big gains that can be made from small fluctuations.

MARKET-NEUTRAL TRADING STRATEGIES

Market-neutral strategies are excellent for the highly-volatile crypto markets, especially in recent times.

Market-neutral strategies can be implemented to profit from either direction of the market.

A great advantage of market-neutral strategies is their emphasis on constructing portfolios to mitigate market risk. In volatile markets, historical results have shown that market-neutral strategies are likely to outperform other strategies.

Market-neutral strategies may be a valuable alternative to a traditional long-only portfolio. A well-designed market-neutral strategy can provide excess returns regardless of the swings in the broader crypto markets. Therefore, it helps to shield traders from market crises and periods of unnerving volatility.

How does Market-neutral strategies benefit traders?

Market neutral trading offers several benefits to trader portfolios, including diversification from directional strategies, the ability to reduce the volatility of a portfolio, and cushion against a market decline.

1.Diversification

To manage risk efficiently, traders combine strategies to diversify their returns over time. With this approach, the long-term returns of a portfolio are not tied to the performance of just one or a few trading strategies. Additionally, market-neutral strategies also produced low levels of correlation to the broader crypto markets.

2.Volatility dampening

Market neutral trading appeals to traders as the strategy delivers lower volatility than conventional strategies. Typically, market-neutral returns are expected to be independent of the broader market. As such, a spike in market-level volatility may not have an impact on the strategy.

3.Risk mitigation

Another benefit that the strategy offers is a way for traders to mitigate severe losses during market sell-off. These strategies typically have a beta-neutral exposure to the market; sharp market movements should not influence the performance of the strategy. In contrast, traditional strategies typically have high levels of market exposure and tend to correlate with the broader market. Except for pure short-selling strategies, market-neutral strategies historically have the lowest positive correlations to the market.

Types of market-neutral strategies

In traditional finance, there are many variations of market-neutral strategies. In the following examples, we shall focus on a sub-set of market-neutral strategies, specifically mean-reversion strategies that are applicable across crypto markets.

These mean-reversion strategies are basis trading and statistical arbitrage.

1. Basis Trade (Futures and Perpetual swaps)

Basis trading typically consists of a long position in the underlying crypto-asset and a short position in its derivative (in most cases, this refers to cryptocurrency futures or perpetual swaps).

Basis trading exploits the price-differential of two markets and is commonly known as ‘cash and carry’. Traditionally, basis trades consist of open positions in the spot market and a futures contract.

Typically, futures contracts are priced higher than the underlying spot markets. However, it is not uncommon for futures contracts to trade lower than the spot market. Thus, the basis can be positive or negative.

2. Statistical Arbitrage

Statistical arbitrage employs quantitative methods to uncover price discrepancies between two or more crypto-assets. Based on these quantitative findings, traders bet on prices of the selected crypto-assets to mean revert by opening long and short positions simultaneously.

To construct a position, traders select crypto-assets that display a strong positive price relationship using statistical methods such as correlation and cointegration.

Risks in Market Neutral Trading

Although a market-neutral strategy offers unique benefits such as diversification and portfolio volatility reduction, it is not risk-free. There are several risks and drawbacks traders need to consider before deploying this strategy.

1. Execution risk

In volatile market periods, executing two-legged spreads can be a challenge. In these periods, price movements can be sharp and fast-changing which may lead to slippages.

2. Correlation/Cointegration failure

It is important to be updated with changes in correlations as fundamental factors may impact individual price movements of crypto-assets. As this happens, a pair trade could quickly turn sour as assets move in different directions than expected. In general, past behaviors are not necessarily bound to repeat.

3. Price Filling

Profiting in pairs-trade or arbitrage often relies on razor-thin margins, hence there is a significant risk that orders will not be filled at the desired price when opening or closing positions in a pairs-trade. In particular, pairs-trade in markets where liquidity is low, which often occurs on small-cap altcoins.

LEVERAGE IN FUTURES TRADING

Leverage allows for better capital efficiency as traders do not have to lock up entire amounts of capital. It increases both potential returns and risks, which is why traders must always exercise caution.

A leverage of 2x or 5x would be considered appropiate for those who are new to futures trading. Especially, for traders who want to use crypto derivatives as a defensive hedge for their portfolios. If an asset were to perform poorly, or opposite what is speculated, a futures trade hedged against this outcome with a certain amount of leverage can compensate for the loss.

The ability to use borrowed funds, or leverage, increases the profitability of a trade by default. A trader with an account balance of $100 could use 10x leverage and borrow $900 to enter a long or short position worth $1,000. If the trade goes in his favor, a 10% price change could help double the initial balance on the account within a very short period.

This is why liquidity plays such a crucial role in futures trading. The higher the leverage used, the higher the need to fill buy and sell orders without slippage.

THE KING OF CRYPTO DERIVATIVES

Binance Futures has grown to become the most liquid derivatives exchange in the market. It provides users with the tightest bid/offer spread to help them avoid unnecessary risks. The vast selection of trading pairs and enormous trading volumes make Binance Futures the preferred crypto derivatives exchange for more than 28.6 million active traders.

BENEFITS OF TRADING FUTURES ON BINANCE FUTURES

Binance Futures offers a huge selection of cryptos. There are more than 530 crypto-to-crypto trading pairs, enabling users to trade anything from DeFi tokens to memecoins like Dogecoin and Shiba Inu. New coins are constantly being listed to provide traders with the best trading experience.
Thanks to its enormous selection of trading pairs, Binance Futures has become one of the most liquid derivatives exchanges in the market. Traders can always expect their buy and sell orders to get filled promptly without having to worry about slippage.
Another attractive benefit of Binance Futures is its exceptionally low fee structure. Maker/taker fees can go as low as 0.000%/0.017%, allowing traders to keep their hard-earned profits. These fees can be slashed even further by simply holding BUSD or BNB.
Binance Futures also provides a generously wide range of leverage for accounts with a balance of $0 to $50,000 so that every trader can grow their portfolio no matter their account balance.
What’s even more fascinating is the ability to make profits regardless of the market’s direction. With Binance Futures, traders can sell high and buy low or buy low and sell high to benefit from any price fluctuation while implementing different strategies like Grid Trading and TWAP.
With more than 28.6 million active users, Binance has built a strong reputation over the years to the point that many people worldwide would argue that if a crypto is listed in Binance, it is a legitimate project.
The vast number of Binance users has helped push trading volumes in the platform into the trillions of dollars. As a matter of fact, Binance was responsible for $7.7 trillion in crypto exchange volume in 2021 and had a 24-hour peak of $76 billion.
But with great power comes great responsibility. That’s why Binance has built one of the most secure trading platforms in the world where users can enjoy different features, such as KYC, 2FA, and Anti-Phishing Code, to protect themselves against nefarious actors.
Users can also rest assured that their funds are SAFU in Binance. Its Insurance Fund holds nearly $300 million to protect bankrupt traders from adverse losses while ensuring that the profits of winning traders are paid out in full.
Lastly, Binance offers support in 17 different languages with an incredibly intuitive and easy-to-use user interface to ensure that any trader from anywhere in the world can participate in the crypto revolution.

CONCLUSION

So now that you know a bit more about what has made Binance such a dominant crypto exchange, you can probably see why it's the preferred trading platform among futures traders. With hundreds of tradable assets, massive trading volume, and a brimming global reputation, it's no wonder why more than 28.6 million traders trust Binance.

Signing up is quick and easy, and once you are set up, trading is a breeze. So join Binance Futures and start trading today!

https://www.binance.com/en/future?ref=331234001