CoinEx | Terms of Contract Trading You Should Learn Before Opening an Order
Affected by factors like the interest rate rise and the tightening state regulations, the crypto market has been sluggish at the beginning of 2022. Since it peaked at $69,000 last year, Bitcoin has continued to fall. Meanwhile, spot assets face drastic drops in value. However, some speculators always manage to make steady returns and even double their wealth in a bear market. Their secret lies in contract trading.
Although contract trading promises high returns, some beginners could be confused by the basic notion and terms of contracts. Such investors are often excited about the profits made by their friends and worry that they may miss the opportunity. As Nietzsche put it, he who would learn to fly one day must first learn to stand. In contract trading, opening the wrong order is worse than opening no order at all. Before getting started, we must first learn what contract trading is, as well as the meaning of the relevant terms.
What is contract trading?
Contract trading is a kind of crypto derivatives that falls into the category of futures. Conventional spot trading appeared as early as the end of the 19th century when sellers deliver actual goods upon the payment by buyers. In traditional futures trades, which evolved from spot trading, the buyer and the seller enter into a contract after the price and date are agreed on, and the two will transfer the ownership of the contracted goods upon the specified date and settle the payment.
In the crypto space, contracts resemble traditional futures, except that they feature a new model called perpetual contracts that allow buyers and sellers to hold the contract indefinitely (i.e. no delivery date).
What makes contract trading so popular (particularly in bear markets)?
Bluntly put, in spot trading, you favor a cryptocurrency and then invest in it. When the price of the crypto rises, you sell it for profit. When the price falls, you can only wait for it to surge. In other words, there is only one way to make money. Though this approach works in a bull market, once the market becomes depressed, you can only hold onto the cryptos you bought and watch them diminish in value. Contract trading, on the other hand, offers the possibility of earning profits despite market swings. Of course, a new way to earn also comes with higher risks. As such, we must fully understand contract trading to minimize the risks and maximize the returns.
There are two direction in contract trading: Long Buy & Short Sell.
Long buy: User A believes that the BTC price will rise. Suppose the current BTC price stands at 40,000 USDT, he spent 4,000 USDT on 0.1 BTC at 10x leverage. When the price rises to 45,000 USDT, he could then sell the crypto for profit. In short, this approach is called “buy first & sell later”;
Short sell: User B thinks that the BTC price will drop. Suppose the current BTC price stands at 40,000 USDT, he spent 4,000 USDT on 0.1 BTC and sold his holding at 10x leverage. When the price drops to 35,000 USDT, he could then buy the crypto for profit. In short, this approach is called “sell first & buy later”;
Opening a position
Having decided which approach to adopt, you’ll then need to buy/sell futures/contracts to open your position or let it remain vacant. If there is no major bear/bull signal, we recommend starting from a small investment/position.
When opening a position, apart from investing the money, you’ll also need to select the leverage, which is commonly indicated by “x” — 3x means a leverage ratio of three times. Right now, mainstream exchanges normally provide leverage ranging from 1x to 100x.
A full position means going all-in on a contract. Such an approach comes with huge risks. By opening a full position, you will cross the Rubicon, and what is ahead is either glory or death. Therefore, it is not an advisable choice for prudent investors.
The specific profit gap between spot trading and contract trading in the above example will be illustrated in the next article because it involves new concepts like the position margin and the margin ratio. Of course, you can always go to CoinEx’s Help Center to find these concepts.