Institutional inflow to crypto is only getting started, but the technology promises to improve the futures markets beyond crypto.
Many traders entering cryptocurrency markets from traditional finance may look to derivatives as vehicles for price speculation and hedging. There are plenty of choices when it comes to exchanges and instruments; however, traders should consider a few key differences between crypto futures and traditional futures before dipping a toe into this rapidly growing market.
Related: 3 things every crypto trader should know about derivatives exchanges
Traders entering cryptocurrency from the traditional markets will be accustomed to futures contracts with a fixed expiration date. Although fixed expiration contracts can be found in cryptocurrency markets, a significant proportion of crypto futures trading is in perpetual contracts, also known as perpetual swaps. This variation of a futures contract does not have a fixed end date, meaning the trader can hold an open position indefinitely.
Exchanges that offer perpetual contracts use a mechanism known as “funding rate” to periodically balance the price variances between the contract markets and the spot prices. If the funding rate is positive, the perpetual contract price is higher than the spot rate — longs pay shorts. Conversely, a negative funding rate means that shorts pay longs.
Moreover, traders that come to cryptocurrency from traditional finance may be used to the portability of their positions across different exchanges. In contrast, cryptocurrency exchanges generally operate as walled gardens, meaning it’s impossible to transfer derivatives contracts across platforms.