From the LBank blog.
Futures contracts are a popular type of derivative that derive their value from underlying financial assets such as stocks, bonds, stock indexes, currencies, and commodities. They provide an effective means to gain exposure to a variety of financial instruments and are frequently used for risk management and hedging purposes. In fact, futures trading currently makes up more than 70% of the cryptocurrency market.
While futures trading allows for leverage, which can increase profits compared to spot trading, navigating the cryptocurrency futures market can be challenging, particularly when confronted with unfamiliar terminology and jargon.
To help navigate this space, it’s essential to familiarize oneself with commonly used terms and phrases in the cryptocurrency futures niche. By doing so, traders can gain a better understanding of this dynamic market and make more informed trading decisions.
Crypto futures present an opportunity for traders to buy or sell Bitcoin at a predetermined price in the future. Once the contract expires, the buyer is obligated to purchase the asset while the seller must provide it. While traditional futures operate this way, LBank offers perpetual contracts which are the most commonly used type of derivative product with the highest trading volume.
Perpetual futures contracts differ from traditional futures as they don’t have a set expiry or settlement date. Instead, they are linked to the spot index price, and traders can choose to terminate them whenever they wish. Essentially, perpetual contracts allow traders to buy or sell contracts without the obligation of selling or buying them at a preset date.
On LBank, Bitcoin futures are traded against USDT, but they can be collateralized and settled using USDT, BUSD, and other cryptocurrencies through the COIN-M variation. In addition to perpetual contracts, LBank Futures also introduced quarterly futures contracts for the BTC/USD trading pair a year after its launch. Currently, they have also added an ETH/USD quarterly futures contract to their platform.
If you are looking to gain a better understanding of how futures trading works, it’s essential to learn some fundamental words and terms. These concepts are critical for traders to comprehend as they navigate the complex world of futures trading.
The use of borrowed funds to trade cryptocurrencies and amplify buying or selling power is commonly known as leverage. This concept is one of the most significant and attractive features provided by crypto futures. With leverage, traders can control a substantial contract value derived from an underlying asset, even with only a relatively small amount of capital.
For instance, let’s assume that you want to invest $5,000 in Bitcoin with 1:10 leverage. In this case, the required margin would be 1/10 of $5,000, which amounts to $500. The margin serves as collateral for the borrowed funds. The higher the leverage, the lower the required margin. For example, with 1:40 leverage, the margin for the same $5,000 worth position would be $5,000/40, which is $125.
Liquidation is a vital risk management mechanism employed by exchanges like LBank Futures to safeguard traders from significant losses. It involves the automatic and forced closure of a trader’s position to prevent their account from falling into negative equity. This occurs when a position lacks sufficient funds to maintain a leveraged trade open.
When liquidation takes place, the exchange closes the position, resulting in the loss of at least a portion of the trader’s invested assets. The extent of the loss depends on the initial margin of the trade and the severity of the price decline.
There are two types of liquidation: partial and total. In partial liquidation, the system lowers the corresponding tier of an adjustment factor to avoid closing all positions simultaneously. In contrast, total liquidation occurs when there is no initial margin left, and the entire position is closed, leading to the loss of all invested assets.
Volume, also known as trading volume, refers to the total number of units of an asset traded within a given time frame. It is a measure of the total number of individual units of an asset that have been exchanged during that period.
When a buyer and seller agree on a specific price, a transaction takes place, and it is recorded by the exchange that facilitates it. This recorded data is then utilized to compute the trading volume.
The funding rate is a periodic payment system in the crypto futures market that is made to either short or long traders. The calculation is based on the difference between the perpetual contract price and the spot price of the underlying crypto asset.
In general, when the market is bullish, the funding rate tends to be positive and increases over time. This means that long traders on the futures contract are required to pay a funding fee to the traders on the short side. Conversely, when the market is bearish, the funding rate becomes negative and tends to decrease further as the bearish trend persists. During these phases, short position holders on crypto perpetual futures contracts are obligated to pay a funding fee to the long traders.
Open interest represents the total number of outstanding futures contracts held by traders at the end of a trading day. This metric is widely used to assess market sentiment and to evaluate the strength behind price movements.
Unlike the total issued shares of a company that remain constant, the number of outstanding futures contracts changes every day as new traders enter and existing traders exit the market.
To calculate the open interest, all the contracts from opened trades are added up and the contracts from closed trades are subtracted. The resulting figure reflects the total number of active futures contracts at the end of the trading day.
Futures trading is a complex and high-risk activity, which makes it imperative for traders to have a comprehensive understanding of every aspect of the trade. With these five terms you can say that you now possess a better understanding of how futures trading works.
Disclaimer: The opinions expressed in this blog are solely those of the writer and not of this platform.
This article came directly from the LBank blog, found on https://lbank-exchange.medium.com/crypto-futures-5-trading-terms-every-trader-should-know-be0c7c995787?source=rss-87c24ae35186——2