DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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Cryptocurrency is considered as a high risk high return asset class. The principle amount of investing can be as low as $10 and you can get returns upto 10-30% in a single trade. That’s just what we do at the stock market right?
The crypto market can be differentiated in this aspect as some exchanges offer an option of futures trading. What is this future trading, what are its benefits and how it’s different from spot trading is all we are going to discuss today.
Futures trading, as the name suggests, is a type of trading which does not necessarily deal with buying and getting ownership of cryptocurrencies or tokens. Instead it is a way of owning a trading contract which is in fact a representation of underlying cryptocurrency’s value.
This trading contract is simply an agreement of buying or selling a token at a specific date in future. As you don’t own any of the underlying assets of contact, you don’t need to pay the complete principle amount equivalent to tokens you buy.
You can own the trading contract with just about 0.8% of asset value but get profits on the total value of your contract. This trading option is provided by exchange platforms like Binance and depending on your exchange, you might get added features like risk management tools.
In order to understand the future trading better, there are certain terms you should be familiar with. Let’s take a look at these few terms and then we’ll see how future trading works in comparison with spot trading.
If you want to understand any field, one of the most important things to do would be to learn the terms related to it. A lot of new terms keep getting introduced into the market and for any newcomer, it is essential to learn them all so as to not get confused.
So, here we are with few of the frequently used terms in Future Trading.
Volume is the term used to measure the market size of the asset. Volume of any assets help the investors to understand the strength of the assets and gives better understanding of volatility.
Volume comes into the picture when a user makes an exchange and the traded assets’ data is updated, this updated information or data gives the measurement of the volume of the asset. The Volume shows the highs and lows of the market.
Leverage is the component which doubles the profit and losses of the money in the same magnitude. The use of Leverage in future trading is crucial and users need to know the component thoroughly.
If you are a beginner then you should set a minimum amount of leverage, maybe 2x or 5x. Choosing the appropriate leverage is quite important to avoid future losses.
The amount appropriate for investors is determined by the type of risk they can bear, the expertise they have to trade and even the comfort level.
Funding rates are the form of payments processed by the traders, the Funding rates consists of two other rates
The difference between the perpetual contract price and Spot price is premium, whereas interest rates are fixed at a particular percentage. These rates are quite essential for the knowledge of a trader. If traders are not aware of the rates it may affect their daily holding cost.
In bull markets you can usually find high funding rates because investors or traders believe that the market will rise soon so they are ready to pay a premium to go for a long run.
Liquidation is the term a trader may not like at all, because it refers to the situation that occurs when the maintenance margin requirements are not fulfilled for a particular leverage position. So what a trader does is, they are forced to sell the losing position.
Liquidation is closely related to leverage. The amount of leverage can decide the liquidation speed. If the leverage is low, liquidation will have slow pace or even it will never happen because of the minor correction that happens in the market. When you have a high leverage, in no time you can observe high liquidity and bare losses.
Spot Trading is where you buy your assets and then wait for a particular period to sell the assets. It totally depends on you when you wish to sell it. Whether the prices are high or low. On the other hand, Future trading completely differs from Spot Trading.
In Future Trading you basically trade contracts, you buy future contracts of the particular cryptocurrency. While you do purchase the contracts, it doesn't mean you have some assets currently, you are not rewarded with any benefits like voting and staking because you are trading in the future.
In Future trading you can pay as low as 0.8% of asset value and you can observe better Liquidity in it. If you expect that the value of assets may pump up then you can buy the future contracts and if you don't feel so, you can just sell it. Future Trading is just a whole lot of predictions.
So far we have discussed what is futures trading and how it is different from spot trading. If you have ever booked your profits in spot trading, you must be aware about the benefits of Spot trading. Similarly, let’s have a look at some of the benefits of Futures trading.
Futures trading offers a simplified experience to traders as they don’t have to undergo a lot of research and preparations before starting with a trade. In spot trade, a trader would have to look for an exchange, fill the wallet of the exchange and then go for a trade, which will then be subjected to government taxes depending on the country.
However, if someone just wants to trade without considering all these factors, futures trading will provide them a simple and easy access to the market including tools to make their trades flexible as they want.
As you know, in spot trading, you will only be benefited when the market is going up and the value of your purchased cryptocurrency is increasing. The same thing is true for futures trading as well with one major difference.
In futures trading, if you think that in the near future the market is going to fall, you can open a short position where as the market falls, you will be profited. Therefore, a trader can earn profits no matter what the state of the market is.
In futures trading, traders get an option of hedging which is a risk management tool. In spot trading users only make profit when the market is going upwards. Whereas in futures trading, a trader can earn profits even when the market is dumping by shorting the market on time.
The most attractive aspect of futures trading is leverage. While opening a position in futures trading, you can take leverage on your principal amount such as leverage of 5x, 10x, 100x and so on. The more leverage you take, more will be the profits and same goes for losses.
Thus, with the right market prediction and appropriate leverage, according to your risk appetite, you can make your portfolio grow significantly in just a single futures trade.
As futures trading offers some great and promising advantages, there are two risks worth considering while you go for futures. Let’s try to understand these two risks associated with future trading.
Leverage is a double-edged sword. If used correctly, it can multi-fold your portfolio in one or two trades. But if things don’t go according to your plan, that same leverage can get you in trouble. If risk is not managed well, then your principal amount and initial margin will be taken by the exchange.
Liquidity is of utmost importance in futures trading as compared to spot trading. In spot trading, you won’t be in any loss unless and until you sell your tokens. Whereas, in futures trading, you don’t have this freedom. If the market goes opposite to your position, your funds will be liquidated and taken by the exchange platform.
Thus there should be enough liquidity available on the platform so that you can short your positions as quickly as possible. The same concept applies when you want to open a new position in the market.
Futures trading is an excellent way of making profits irrespective of market sentiments. In certain cases and market movements, futures trading makes far more sense than spot trading. However, it does come with its set of risks which you are now aware about.
If you are planning to start futures trading, choose an exchange that provides this trading like Binance and keep the benefits and risks in mind before you proceed further. I hope this article gave you a better idea about what futures trading is and how it works.
If you have any more questions about futures trading, feel free to reach out to us. Until then check out our other articles and educate yourself more about cryptocurrencies and its different sectors.
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