3 major mistakes to avoid when trading cryptocurrency futures markets

Many traders frequently express some relatively large misconceptions about trading cryptocurrency futures, especially on derivatives exchanges outside the realm of traditional finance. The most common mistakes involve futures markets’ price decoupling, fees and the impact of liquidations on the derivatives instrument.

Let’s explore three simple mistakes and misconceptions that traders should avoid when trading crypto futures.

Derivatives contracts differ from spot trading in pricing and trading

Currently, the aggregate futures open interest in the crypto market surpasses $25 billion and retail traders and experienced fund managers use these instruments to leverage their crypto positons.

Futures contracts and other derivatives are often used to reduce risk or increase exposure and are not really meant to be used for degenerate gambling, despite this common interpretation.

Some differences in pricing and trading are usually missed in crypto derivatives contracts. For this reason, traders should at least consider these differences when venturing into futures markets. Even well-versed derivatives investors from traditional assets are prone to making mistakes, so it’s important to understand the existing peculiarities before using leverage.

Most crypto trading services do not use U.S. dollars, even if they display USD quotes. This is a big untold secret and one of the pitfalls that derivatives traders face that causes additional risks and distortions when trading and analyzing futures markets.

The pressing issue is the lack of transparency, so clients don’t really know if the contracts are priced in stablecoin. However, this should not be a major concern, considering there is always the intermediary risk when using centralized exchanges.

Discounted futures sometimes come with surprises

On Sept. 9, Ether (ETH) futures that mature on Dec. 30 are trading for $22 or 1.3% below the current price at spot exchanges like Coinbase and Kraken. The difference emerges from the expectation of merge fork coins that could arise during the Ethereum merge. Buyers of the derivatives contract will not be awarded any of the potentially free coins that Ether holders may receive.

Airdrops can also cause discounted futures prices since the holders of a derivatives contract will not receive the award, but that’s not the only case behind a decoupling since each exchange has its own pricing mechanism and risks. For example, Polkadot quarterly futures on Binance and OKX have been…