If you’ve been thinking of testing crypto contract trading but are unsure of what it really means, how it works, and how to get started, then you’ve landed on the only page you’ll need.
Now, I’ve added a summary for those who are in a hurry to get started where you will get a basic overview of the concept.
For those of you who want to learn in more detail, keep reading, most of your questions will be answered below.
Key takeaways
- Crypto contract trading allows traders to speculate on cryptocurrency prices with leverage, offering opportunities to profit in both rising and falling markets without owning the actual coins.
- Despite its potential for high returns, it comes with significant risks like leverage and liquidation, starting small, and using risk-mitigating resources such as calculators or demo accounts are strongly recommended.
Crypto contract trading explained
Crypto contract trading in the simplest terms means trading with derivatives contracts, or leveraged contracts.
Here traders can buy cryptocurrencies such as Bitcoin and Ethereum without actually owning the coin and being able to speculate on the future price with leverage.
Leverage gives traders the option to trade with more money than what they currently have and it is what is fueling these contracts.
You also have the option to make profits in both rising and falling markets. Since shorting with leverage is very common, many traders make good money by short-selling contracts when the market is negative.
Crypto contracts let you buy, sell, and short cryptocurrencies and they come in different forms such as:
- Futures contracts: Futures contract lets traders speculate on the future price of a cryptocurrency with a set expiration date. Profit can be made in both positive and negative directions. In my experience, futures are difficult contracts to predict because you need to be sure of the price at a certain time in a few days or up to a few weeks in the future.
- Perpetual swap contracts: Perpetual swaps or inverse perpetual swaps are similar to futures except that they don’t have an expiration time. They often offer high leverage and can be traded on crypto exchanges. Perpetual swaps are easier to trade for beginners since there is no settlement time in the future. The contracts keep running as long as the position remains open.
- Margin-traded contracts: Margin-traded contracts are leveraged contracts that offer the trader to trade a big position with less capital. Traders can use as little as a 5% or even a 2% margin requirement to open a position. This often involves high leverage and is considered high risk. It is however a good option for traders with small accounts who want to increase their purchasing power.
- CFD contracts: Contracts For Difference (CFD) are contracts that are settled between a financial institution such as a CFD broker and an investor. It is a type of derivatives contract that lets the investor speculate on futures prices without owning the underlying asset. It is a common type of trading product for beginners as the brokers are often well-equipped with trading tools and strong regulation in the back to increase security.
Crypto contract trading is a way of speculating on the future price of a cryptocurrency without owning the coin itself. Instead, you trade a contract that often offers leverage to increase position size where you can go both long and short to make profits.
This style of leverage trading is considered high-risk and beginners should spend a considerable amount of time learning how these contracts work and start very small or use a demo account.
How does it work in the real markets?
When you are trading crypto contracts, you can take a “long” position (betting the price will go up) or a “short” position (betting the price will go down).
Before opening the position, you are often free to select the amount of leverage you want to use, add your stop loss order, and place your take profit order.
The leverage decides how big your position is (and how much margin capital you will use), the stop loss order is an automatic order type that will block unwanted losses, and the take profit order is an automatic order type that will lock in future profit at a specific price.
For example, if you choose to open a position size worth $5000 and your own margin capital is worth $500, then you would need to use 10x leverage.
Once the position is closed, your profit and loss are calculated, and the leverage is paid back to the broker you are using.
The contracts you open while trading can not be transferred to another exchange or account. They simply remain open until you choose to close it.
We’ve written a guide on leveraged positions which is a helpful addition to this guide where you will learn how a contract position works.
These positions work in the same way so I recommend reading it.
What are the benefits?
Now, why would you want to trade crypto contracts instead of using the standard spot market?
Well, there are many benefits to choosing the way of trading.
Below are the top benefits that I have found during my years of trading:
- Increased position sizes: With crypto contracts, you can amplify your position size up to 200 times depending on what market you trade and what exchange you are using. This is helpful for traders who lack proper funding and can’t get over the profit threshold that is holding them back from making good money. Many seasoned traders have taken the step from being a beginner to a pro thanks to the use of leverage. To learn more about how to choose leverage I recommend reading our guide on the best leverage for crypto trading.
- Option to short-sell: Short-selling gives you twice as many opportunities since you can now profit when the market is falling. I must say that in the beginning, it is difficult to wrap your head around how this works but once you have tried it out you’ll start to like it. There is something that makes it easier to predict when the market is going to fall due to the fear it creates.
- Trade more markets: Most platforms that offer contract trading have an abundance of coins to choose from and often offer many exotic coins. This is something that you can’t find on your regular spot market exchange. The different contracts also offer one way of going long and one way of going short.
- 24/7 trading: As with most crypto trading platforms, contract trading is also open day and night, 7 days a week. This enables traders who might work during the day and cannot place trades at these hours. The weekends have become a good time for traders with jobs to place trades and work on their strategies.
- Hedging: When you hedge you are placing a trade in both directions with the same amount, both long and short. This makes your positions cancel each other out and your position is protected both on the upside and the downside. Traders tend to hedge when the market is moving in a wild fashion and it is difficult to predict the outcome. Traders also hedge to avoid a short-term loss if they predict that the market will go in the opposite direction for a shorter period.
- Suits any trading strategy: Contracts let you trade any strategy, no matter if you are a long-term trader, scalper, or an intraday trader. You can go long and short to try to profit from market moves. In fact, most professional traders have a crypto leverage trading strategy for both falling and rising markets.
You will probably find your own benefits when you learn the ins and outs of contract trading, feel free to share them in the comment section below.
Most common risks
Let’s go over some of the most dangerous risks with contract trading that every new trader should be aware of before testing it.
Here is my personal list of the things that increase the risk to a whole new level:
- Leverage: Leverage is by far the biggest problem for beginners, and for good reason. It is easy to use so they often overleverage without knowing. It seems good when you are making profits, but as soon as you start losing you realize how powerful and risky it is. Make sure that you don’t overleverage. Start out small and be careful.
- Liquidation: Liquidation is the ultimate failure for traders who do contract trading. Liquidation means that your position has gone against you and you don’t have enough money in your account to support the loss. First, you will get a margin call from your exchange to let you know that you are running low on margin. If you decide to do nothing and the market keeps going against you, you will lose all your money, and your account is left at $0.
- High fees: Most traders don’t know this but as you increase your leverage through contract trading, your fees are also increased. Imagine that you are paying $0,30 in fees per position you open in the spot market. That’s almost nothing. However, if you take the same position and open it with a crypto contract with 100x leverage, you are now paying $30. This can easily eat up your account if you are not careful. Just make the multiplication of opening and closing the position 15 times a day. That is 30 x 30 which equals $900.
- Complexity: Contract trading often brings a decent amount of complexity around how it works and how to actually do it in a safe way. This is where most beginner traders get confused and they tend to lose a lot of money just from the lack of knowledge. Many things can go wrong. For example, if you forget to add your stop loss, or you add an extra zero when you choose leverage, or you forget to close out a position before you go to bed, or ten other dangerous things. That’s why I always recommend testing a demo account before you start. This way you can spend a week or two making the beginner mistakes without taking a financial hit.
As you can see, the list of risks is not as long as the benefits, but don’t let it fool you. The risks are exponentially more dangerous than the benefits, that’s why so many fail at it.
This style of trading often turns into some form of gambling for traders who can’t control the rush of profits or losses.
I consider that leverage trading is not gambling because there are many differences, but it’s always the weak one that loses hard.
Tools and platforms you can use safely
There are plenty of tools to use to improve your chances of success with contract trading.
Many of them can be found on our website and they do help beginner traders protect themselves against mistakes and unwanted losses.
Read through this list of tools and platforms to see which could help you the most:
- Liquidation Price Calculator
- CFD calculator
- Leverage Calculator
- Stop Loss Calculator
- Crypto Leverage Trading Platforms
- Risk Reward Ratio Calculator
The two tools I can’t trade without are the liquidation price calculator and the leverage calculator.
They are optimized to help you track your liquidation price when trading leveraged crypto contracts.
The leverage calculator is a great tool that helps you choose the right margin capital for your position based on your leverage and the desired position size.
The crypto leverage trading platforms article is a review of some of the most reputable platforms that securely offer crypto contract trading.
These exchanges are equipped with the latest trading technology, they offer the lowest leveraged fees on the market, and the security is very good.
FAQ
With crypto contract trading you have access to leverage which increases your position size and lets you trade with more money than you have. In spot trading, you trade the money you have deposited and don’t have access to borrowed capital.
Crypto contract fees are increased in relation to how much leverage you use. With 10x leverage, your contract fees are 10 times higher. Some exchanges also change an overnight fee or a management fee for holding crypto contracts overnight.
The legality of crypto contract trading depends on the jurisdiction you are trading from and the exchange you are using. Jurisdictions like the UK have banned all types of crypto contracts.
Conclusion
In a nutshell, crypto contract trading is a way of speculating in the crypto markets without owning the underlying asset and with the benefit of using leverage.
This enables traders to bet on both rising and declining markets with so-called “long” and “short” positions.
There are a variety of crypto contracts out there such as futures, perpetual swaps, CFD contracts, and margin-traded contracts which all have their differences.
It is highly risky if not done right and the best way to get started is to use a demo account first and keeping an eye on the risks at all times while trading the market.
