Cryptocurrency futures are contracts between two investors who bet on the currency’s future price. They make these bets by leveraging and providing margin as the broker requires to the deal without purchasing them. Futures allow investors to hedge their risks as the market is volatile. They get firm confirmation from the buyer to buy the same at the agreed price irrespective of the international market developments. However, all trade is carried out through a licensed broker who settles the margin daily for all futures trade.
The Margin money in a futures agreement is a percentage of the contract value, and this money has to be maintained in your account. It provides you with leverage as in cryptocurrency futures trade. You are allowed to leverage by large value transaction that is only limited to the margin you provide in your account for brokerage. Brokers allow you the money to take leverage, as you may find by browsing at https://www.btcc.com/ so that you can register on the world’s longest-running crypto exchange.
Why is margin required for Futures Trading?
Brokers provide margin to leverage your position and carry risks, although you can make a windfall if the market is in your favor. When you buy on margin, you are borrowing money from your broker to trade in cryptocurrency futures. In other words, it means an investor can pay less than the notional value of a trade.
It offers the investor greater potential for profits or otherwise larger losses. Therefore, you must deposit the margin money as calculated by your broker in your account as you trade with leverage.
Margin is required due to the risks that the leverage provides to investors. Due to volatility in the market, it protects the broker from losing money.
Cryptocurrencies are traded on a blockchain network which is a peer-to-peer network. Each transaction on the network is verified by the miners who are participants. They readily do the verification because they get compensation for the verification process.
It would be fair to know how the margin is calculated in this context. The calculation is done based on the initial margin. It means the initial margin is based on the maximum potential loss that may occur to an investor on a single day. It is also noteworthy in crypto futures trading that the greater the volatility of the stock, the greater the risk, and therefore the exchange will ask the investors to deposit a larger margin. Sometimes, the exchange may also collect MTM or mark-to-market margin as per the daily volatility in the futures price.
Summary
Trading in cryptocurrency for beginners may be a little daunting, and therefore you must exercise caution. It is better to leverage within one’s means than take the path of expecting too much and end up in failure. It is better to avoid losses as investors can also settle their contracts before expiry. It is not binding on the investor to stay invested till the expiry date.
Further, to close or cancel out a futures contract position, an investor has to enter the opposite type of trade and get the same removed from his account.