Novice traders are usually drawn to futures and options markets due to the promise of high returns. These novice traders watch influencers post incredible gains and at the same time multiple advertisements from derivatives exchanges that offer 100x leverage are at times irresistible for most.
Although traders can effectively increase gains by recurring derivatives contracts, a few mistakes can quickly turn the dream of outsized gains into nightmares and an empty account. Even experienced investors in traditional markets fall victim to specific issues in cryptocurrency markets.
Cryptocurrency derivatives function similarly to traditional markets because buyers and sellers enter into contracts dependent on an underlying asset. The contract can not be transferred across different exchanges, nor can it be withdrawn.
Most exchanges offer options contracts priced in Bitcoin (BTC) and Ether (ETH), so the gains or losses will vary according to the asset’s price fluctuations. Options contracts also offer the right to acquire and sell at a later date for a predetermined price. This gives traders the ability to build leverage and hedging strategies.
Let’s investigate three common errors to avoid when trading futures and options.
Convexity can kill your account
The first issue traders face when trading cryptocurrency derivatives is called convexity. In this situation the margin deposit changes its value as the underlying assets’ price oscillates. As Bitcoin price increases, the investors’ margin rises in US dollar terms, allowing additional leverage.
The issue emerges when the opposite movement occurs and BTC price collapses and consequently, the users’ deposited margin decreases in US dollar terms. Traders often get too excited when trading futures contracts and positive headwinds reduce their leverage as BTC price increases.
The main takeaway is traders should not increase positions solely due to the delivery caused by the increasing value of margin…
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