Binance Futures: An In-Depth Analysis
Binance Futures
Market traders use several strategies, instruments, and methods when trading in order to maximize their profits and minimize their risk as much as possible. One such trading method is using futures contracts. These contracts allow traders to lock in the price of the underlying asset - triggering a trade at the specified price. In this article, we will take a look at what futures contracts are, as well as how crypto-based futures contracts can be traded on Binance and whether or not Binance Futures trading is worth it.
What Are Futures Contracts?
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.
Underlying assets include physical commodities or other financial instruments. Futures contracts detail the quantity of the underlying asset and are standardized to facilitate trading on a futures exchange. Futures can be used for hedging or trade speculation.
Pros and Cons of Futures
When it comes to trading, there is no trading strategy that does not have a moderate to a high level of associated risk. Let’s take a look at some of the pros and cons of trading futures.
Pros
- Enables Longer-Term Speculation
By investing in futures contracts, traders are able to speculate the price of the underlying asset several months in advance.
- Hedging Opportunity
Companies can hedge the price of their raw materials or products they sell to protect against adverse price movements.
- Lower Barrier to Entry
Futures contracts may only require a deposit of a fraction of the contract amount with a broker.
Cons
- Risk Losing Initial Margin
Investors have a risk that they can lose more than the initial margin amount since futures use leverage.
- Missing Out On Favorable Movements
Investing in a futures contract might cause a company that hedged to miss out on favorable price movements.
- Amplified Losses
Margin can be a double-edged sword, meaning gains are amplified but so too are losses.
Binance Cryptocurrency Futures
Thanks to Binance, cryptocurrency traders can now also enjoy the benefits of trading futures contracts using cryptocurrency as the underlying asset. Binance offers crypto futures contracts that are settled and collateralized in their based cryptocurrency; these contracts are also known as COIN-margined contracts. For instance, investors can trade Bitcoin-margined contracts, which allows them to earn Bitcoin when their futures position returns a profit.
What is Binance?
Before we continue analyzing whether or not trading Binance cryptocurrency futures is worth it or not, let’s recap who Binance is.
Binance is one of the world’s largest cryptocurrency exchanges in terms of daily trading volume and boasts low fees, access to a vast amount of cryptocurrencies, as well as advanced features for veteran cryptocurrency investors and traders. However, Binance is currently not available to U.S. customers. U.S. customers will have to use Binance.US - a more limited version of the largest cryptocurrency exchange in the world.
Binance is better for advanced cryptocurrency traders from all parts of the world, but cryptocurrency newcomers can also benefit from all of the services that the platform has to offer if they take the time to learn how to use the platform. There are several ways to earn passive income with your cryptocurrency on the Binance platform thanks to the suite of DeFi services the platform offers users. Also, since the platform is a centralized exchange, users can trade both crypto-to-crypto trading pairs and fiat-to-crypto trading pairs.
Why Trade Cryptocurrency Futures?
During a bull market, it could be advantageous to know how these alternative trading techniques work. For example, COIN-margined futures offer unique features that allow long-term investors to participate in the futures markets without converting their crypto assets to stablecoins. Let’s take a look at some of the reasons why someone would trade cryptocurrency futures.
Earn Cryptocurrency
As mentioned, traders are able to earn cryptocurrency through trading cryptocurrency futures when their trades are profitable. This is excellent if you are a long-term investor. Investors are more likely to hang on to their cryptocurrencies, especially in the current bull market. Profits from futures contracts may be added to your long-term stack since they are settled in the underlying coin. Furthermore, when prices continue to climb, the value of your collateral will grow in tandem. Simply said, this is an excellent strategy to grow your bitcoin holdings in the long term.
No Funding Fee For Quarterly Contracts
While perpetual contracts are increasingly popular, traders should also consider quarterly COIN-margined contracts in the current growth environment. Unlike perpetual contracts, quarterly contracts do not carry a funding fee. When held for 1-3 month holding periods, traders can expect to avoid funding fees, which would otherwise be incurred in perpetual contracts. Funding fees tend to correlate with the underlying trend of the market. When the market is extremely bullish, funding fees will surge as traders are willing to pay more to go long on a futures contract. Additionally, funding calculations consider the amount of leverage used, which may have a big impact on one’s profits and losses.
Non-Linear Payout
COIN-margined futures have a non-linear payout structure. In a contango market, COIN-margined contracts tend to generate more profits because of the rising value of the collateral.
Is Cryptocurrency Futures Trading on Binance Worth It?
When Looking at Cryptocurrency Futures
Cryptocurrency futures allow traders to speculate on a longer time horizon. This can be very beneficial in both a bull market and a bear market if the trader speculates the price correctly. What’s more, in a bull market the trader not only reaps the benefits of the value of their cryptocurrency holdings rising. If they also speculated that the prices of the coins in their portfolio would rise in the near future then not only would they receive more of the underlying cryptocurrency on contract expiration, but they will also receive the acquired underlying asset at the market price at the time.
In Terms of Binance Itself
Being the largest cryptocurrency exchange in the world in terms of trading volume means that Binance has a large amount of liquidity on the platform. This is beneficial because a trader is able to open relatively large positions without really impacting the price of the underlying cryptocurrency that they are trading with the futures contract.
Although Binance is ideally suited for veteran cryptocurrency traders, newcomers can also utilize the wide array of trading tools and instruments that the platform offers. This allows traders to experiment and deploy various trading approaches.
Being Aware of the Risks
Of course, there are some risks that every trader needs to be aware of when trading Binance futures. Besides the risks associated with leveraging your positions, there are also the risks relating to Binance’s regulatory status and the cryptocurrency market turning against an investor.
Binance has been under the regulatory spotlight globally and as a result, has had to shut down some of its offerings in several jurisdictions globally. Should the respective regulators decide to investigate Binance then it may result in users’ funds being frozen. Although Binance seems to be slowly addressing its regulatory situation in each jurisdiction, it is still something to be aware of in order to avoid your funds being frozen. Binance being such a big cryptocurrency exchange has definitely attracted the attention of regulators.
Secondly, if the market turns against you when trading cryptocurrency futures contracts, as is the case with all other tradings, then you will make a loss. The loss is further amplified if you leverage your position. Therefore, it is important to keep in mind that the cryptocurrency market is extremely volatile. Despite having demonstrated a trend of rising in the medium to long term, anything can happen in the cryptocurrency space. If you have done your own research, and are confident that the market will swing in favor of your speculation, then cryptocurrency futures contracts are a great tool. If not, it may be best to trade shorter time horizons until you are somewhat familiar with the cryptocurrency market.
Binance Futures: Conclusion
Futures contracts allow traders to speculate the price movement of an underlying asset over the medium to long term and then lock in a trade at a future price. Cryptocurrency futures contracts enable traders to enjoy the benefits of futures contracts while trading cryptocurrencies. What’s more, in a bull market the trader not only receives their profit payout in the contract’s underlying cryptocurrency but also gets to benefit from the increase in the price of the underlying asset - offering a kind of compounded gain.
Binance is the largest cryptocurrency exchange in the world in terms of the daily trading volume. This means that there is more than enough liquidity on the platform for traders to make their trades. Traders just need to be aware of the risks associated with trading cryptocurrency futures contracts as well as trading them on Binance. Should the trader leverage their position, they may end up with amplified losses. On the other hand, Binance’s current battle with global regulators may result in traders’ funds being frozen on the platform should any of the regulators want to perform an investigation on the platform.
