Futures

Futures and why we do not recommend them

How it works

Trading a future on ETH involves buying or selling a contract to buy or sell ETH at a specific price at a future date. This allows traders to bet on the future price of ETH and potentially make a profit if the price moves in the direction that they have predicted. ETH futures contracts are typically standardized and traded on organized exchanges, which provides a degree of liquidity and transparency to the market.

For example, if you expect the market price of ETH to fall in the future and you want to protect yourself against any potential losses, you could buy a futures contract that allows you to sell your ETH at the market price at a specific future date. If the market price of ETH does indeed fall, you can then sell your ETH at the market price and avoid any potential losses.

However, it is important to note that hedging with futures is not without risks. The market price of ETH could move in the opposite direction to what you have bet on, in which case you could end up losing money. Additionally, the cost of buying and selling futures contracts can be quite high, which can eat into any potential gains that you might make. For these reasons, it is important to carefully consider whether hedging with futures is the right strategy for you.

Limitations

Hedging with futures has some limitations. If the price of the asset moves up, you can end up missing on a significant amount of money. Additionally, when selling OTC future contracts, the initial margin is often of 100% which is quite high, so requires you to have enough cash at disposal.

In contrast, using put options is generally considered to be a better way to hedge against market risks. Options give you the right, but not the obligation, to buy or sell an asset at a specific price in the future. This means that you can limit your potential losses while still allowing for the possibility of making gains if the market moves in your favor. However, buying put options has an upfront cost but there is no margin to be put as for futures contracts.