3 Common Pitfalls to Avoid in Crypto Futures Trading | BIT
When it comes to the world of cryptocurrency, futures trading is a popular strategy among traders. Crypto futures trading involves speculating on the price of cryptocurrencies without owning them. During futures trading, borrowed capital can be used to amplify your buying and selling power in the market. This affords a quick way for investors to enjoy multiplied gains with the least amount of investment, increasing the appeal of crypto futures to traders. However, as a relatively new and volatile space without much history to base your judgments on, even seasoned investors are not infallible to pitfalls such as making emotionally driven trading decisions. Are you guilty of these common errors made during crypto futures trading too? Read on to find out.
1. Convexity in Crypto Futures Trading
Leverage, or the borrowed funds that enable traders to multiply their gains from trading, has always been one of the reasons pulling investors into the crypto futures market. However, a common mistake when opening a leveraged position for crypto futures is overlooking convexity, which is how the price of a future contract changes with a change in the underlying asset’s price. Before you can open a position for futures, you are required to set aside an amount of money called the margin, which typically includes two components as follows:
- Initial margin: This is the amount of money you need to trade crypto futures.
- Maintenance margin: This is the amount you need to keep in your fund at all times to protect your lender against losses from your trade, and it is a part of your total initial margin.
When your maintenance margin fails to meet the required amount, it can trigger the liquidation mechanism in your crypto trading platform. For example, imagine you put in an initial margin of US$1,000 and traded with 10 times leverage. This means that your effective investment amount is now US$10,000, of which US$1,000 is your initial margin and US$9,000 is leveraged. Should the value of your underlying asset decrease by more than US$1,000, your losses will apply to your borrowed funds. To avoid this, your trading platform will liquidate your position. Consequently, your trade will be closed at the prevailing price, causing you to lose your initial margin.
This is exacerbated by the possibility of drastic price action resulting from liquidation and the consequent decoupling, where the price of your underlying asset diverges from prices in the stock market. Thus, traders should always thoroughly consider convexity and be aware of how the ease of liquidation increases with the amount of leverage when trading crypto futures.
2. Isolated Margin
In many crypto trading platforms, traders often need to transfer funds from their spot trading account to their futures trading account. Occasionally, these exchanges offer you the option to choose whether you want your margin to serve many positions or remain isolated. For traders new to the crypto sphere, this can be confusing to grasp. As a result, margins may not be managed properly, leading to liquidation.
3. Pricing and Trading Structures of Crypto Futures Contracts
While the U.S. dollar is widely used in international trading and quotes on crypto trading platforms may even be shown in this currency, not all such trading services use the U.S. dollar. However, it can be easy for traders to overlook the pricing and trading structures in their crypto futures contracts. Consequently, this oversight subjects traders to additional risks and distortions when analyzing or trading crypto futures and contracts priced in stablecoin.
Minimize Risk in Trading Crypto Futures on BIT
Admittedly, trading crypto futures can be tricky, especially when you are just getting your feet wet in crypto. Nonetheless, with awareness of the potential pitfalls and doing your due diligence for your chosen future instead of trusting the information circulated on social media, you will be empowered to avoid trading mistakes. Apart from this, selecting a crypto trading platform that takes all the precautions to provide you with secured leverage trading is equally vital, and this is where BIT can bridge the gap.
Designed with a sophisticated view of risk in mind, BIT features an innovative Portfolio Margin model that comprehensively analyzes your risk, by including factors such as outright trades and options trade. With a more accurate reading of your portfolio risk, you can be assured that your margin requirements on BIT is optimized alongside your risk protection and capital efficiency. Complementing this is our unified margin system that enables you to manage all trading instruments under one account and trade based on your total U.S. dollar holdings. By streamlining your crypto trading process, BIT eliminates errors arising from navigating multiple accounts, platforms and currencies.
Built with these robust features, BIT makes an ideal choice for any crypto futures trader striving to reduce risk exposure while simultaneously growing their portfolio and maximizing potential profit. Take a step into the exciting world of crypto futures safe in the knowledge that strong protective measures are in place today with BIT.