Financial derivatives are discussed a lot in cryptocurrency derivatives trading. It is worth noting that derivatives are one of the oldest forms of financial contracts in the market.
What is Cryptocurrency Derivate?
Cryptocurrency derivate refers to digital currency derivatives that recently got traded in the crypto trading market. The first cryptocurrency derivate was traded on the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange in December 2017.
Cryptocurrency derivatives can help to hedge against and benefit from price movements. Derivates trading has taken the crypto market by storm. You would be surprised to know the open interest of Bitcoin futures and swaps as already crossed $4 billion by the start of the year 2020.
Many traders overlook the characteristics of a perpetual swap that derives from spot margin trading to join the fray and intension to double up your capital.
Here are the top three mistakes you should avoid in cryptocurrency derivate trading.
1. Avoid Overleveraging
Leverage is the borrowing of funds to make investments. In derivates trading, investors can control a large portion of derivates for a little amount of outlay or not spending anything at all. The cryptocurrency derivates exchanges allow you to access 100x worth of leverage.
In simple words, for every 1 Bitcoin you deposit, you can control up to 100 Bitcoins in an open position. Though it might sound attractive to you as an investor as a small 1% move upwards at the Bitcoin prices could double up your capital, there is always a hidden risk if the reverse happens. You could lose your entire money in a mere >1% move.
According to cryptocurrency trading experts, the “breathing room” for trading increases as leverage decrease. The higher leverage you opt-in trading, the nearer your liquidation price becomes. 100 x leverage means the liquidation prices are just ~1% away. Lower leverage, like 5%, will move the liquidation price ~25% away.
Since the cryptocurrencies are highly volatile, you need to stay away from over-leverage, or you might be “stopped out” before your trade idea reaches the bearing fruit stage.
2. Avoid Using Liquidation Price as Your Stop Loss
A stop-loss order refers to an automatic trade order given by the investor to their brokerage. The futures risk management systems require an initial margin to open, and you need to hold a minimum amount of equity to keep the position “alive.” Bitcoin derivates exchanges require you to keep paying the profits of the person on the other side of the trade.
The cryptocurrency derivatives trading uses different prices to manage positional risk to traders –liquidation price and bankruptcy price. As the traders use high leverage in a highly volatile market, there are instances when huge slippage occurs, and the trader undergoes bankruptcy.
To ensure the winning trader gets paid, derivates exchange force a position to undergo liquidation before it hits bankruptcy price. If you allow the exchange to liquidate your position, you will end losing more if you had used a stop-loss order separately.
3. Avoid Entering the Market Immediately
For encouraging liquidity, cryptocurrency derivate exchanges offer rebates for “maker” orders. The exchanges provide a 0.0025% rebate over a 0.075% fee. Maker orders wait for a fill while the taker orders enter the market immediately. While the discount offered on “Maker order” seems small, these fees can add up over time.
The difference between the maker and taker fee is 0.1%. According to experts, patience can pay you rich dividends in the long term. It is always a good idea to wait for the fill. It is still a good practice to sell in rallies and buying dips, and using the maker order as much as possible is always a good idea.
4. Not Testing Your Strategy
For any trader, strategy is everything. While it is easy to reap profit in the stock market through tried and tested strategies, the same does not apply to cryptocurrency derivate market. The cryptocurrency market is relatively new which makes profiting much more challenging.
You can use trading simulators to try strategies before applying them. Another alternative is using different paper-trading platforms to trade cryptocurrency derivate of all manners and sizes.
You need to learn a few things like how to use basic-to-advanced order types, designing strategies, and bots. However, try these strategies before taking them live to trade in the market. Cryptocurrency derivatives trading can be risky at times without the knowledge of what’s going in there.
The market is excited about cryptocurrency-based derivatives. It is common to observe that the derivatives market is crucial for a vibrant financial ecosystem, and Cryptocurrency Derivates is the bridge that is needed to create awareness about cryptocurrency in the mass market. However, it will help if you exercise caution in trading.