What is a Crypto Assets contract

In recent years, with the rise of digital currencies, crypto asset contracts have gradually become a hot topic in the financial field, attracting the attention of many investors. So, what exactly are crypto asset contracts?

Simply put, cryptocurrency futures contracts are a type of trading contract with cryptocurrency as the underlying asset. Unlike traditional spot trading, spot trading involves directly buying and selling the cryptocurrency itself, paying for it and taking it away, just like buying vegetables and fruits in the market at the current price.

Cryptocurrency futures trading is more like a ‘betting agreement’ where the trading parties do not directly hold the cryptocurrency, but instead sign a contract based on their expectations of the future price trend of the cryptocurrency. The contract specifies a specific time in the future and a specific price for the transaction.

For example, you and your friend predict the price of Bitcoin three months later. If the price rises as you expected, your friend has to sell it to you at a lower price according to the agreement; if the price falls, you have to buy it from your friend at a higher price. However, in real cryptocurrency contract trading, the counterpart is usually a professional trading platform, and the trading rules are more complex and standardized.

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Types of Crypto Assets Contracts

• Perpetual Contract

In the world of crypto asset contracts, perpetual contracts are highly anticipated. It’s like an endless race track with no expiration date, allowing traders to hold contracts indefinitely based on their market judgment. This means that as long as you have enough funds and confidence, you can wait for the market to develop in the direction you expect without worrying about forced liquidation when the contract expires.

How does it maintain market balance? This brings us to the funding rate mechanism. When there are more people bullish in the market and the funding rate is positive, long positions need to pay fees to short positions, which increases the holding cost for long positions and suppresses excessive bullish sentiment, encouraging some to turn bearish. Conversely, when there are more bearish people, and the funding rate is negative, short positions need to pay fees to long positions, increasing the cost for short positions and prompting the market to return to balance.

Taking Bitcoin perpetual contracts as an example, the price of Bitcoin fluctuates dramatically. In a bull market, investors generally have a bullish view and buy Bitcoin perpetual contracts. At this time, the funding rate rises. Although the longs’ position cost increases, they still choose to hold because they have confidence in the subsequent rise of Bitcoin and expect the profits from the price increase to far exceed the funding rate cost. The shorts, on the other hand, offset the potential losses from price increase to some extent by collecting funding rates. This dynamic equilibrium mechanism enables the Bitcoin perpetual contract market to maintain a relatively stable trading order even in extreme market conditions, allowing investors to enter and exit flexibly according to their own strategies.

• Futures Contract

Futures contracts are like a relay race with a clear finish line and a fixed delivery date. At the beginning of the contract, the two trading parties agree to deliver crypto assets at a pre-determined price at a specific time in the future. This requires investors to have a more accurate prediction of the market price at a certain point in the future, as the contract must be executed at maturity.

Ethereum futures contracts are widely used in the market. Assuming a blockchain technology company expects to need a certain amount of Ethereum for project development in three months, in order to lock in costs and avoid the risk of budget overrun caused by a rise in Ethereum prices, it can buy Ethereum futures contracts that expire in three months.

If the price of Ethereum does rise as expected at the time of expiration, the company will be able to purchase Ethereum at a lower price as agreed in the contract, saving costs; conversely, if the price falls, although it may seem like a loss, from the perspective of risk management, the company has locked in costs in advance, ensuring the stability of the project budget. For Ethereum miners, if they anticipate an increase in mining difficulty and a potential decrease in output in the future, and are concerned that fluctuations in the price of Ethereum may affect their earnings, they can use the sell-out futures contracts to lock in the selling price of mining output in advance, ensuring stable profitability.

• The Difference Between Perpetual Contracts and Futures Contracts

• Options Contract

Option contracts are like special “coupons” that give buyers the right, but not the obligation, to buy (call options) or sell (put options) crypto assets at a specific price at a specific time in the future. This gives investors great flexibility, allowing them to choose whether or not to exercise this right based on market changes.

When investors are bullish about the future price trend of Litecoin, they will buy Litecoin call options. For example, if the current price of Litecoin is $200, investors buy a call option with a strike price of $220 and an expiration date of three months, paying a $20 option premium. If the price of Litecoin rises to $250 at the expiration of three months, investors can exercise the option, buy Litecoin at the strike price of $220, and sell at the market price of $250, deducting the $20 option premium, making a profit of $10 per share. If the price of Litecoin is lower than $220 at the expiration, investors can abandon the option and only lose the $20 option premium.

On the other hand, if investors believe that the price of Litecoin will fall, they can buy put options. For example, with an exercise price of $180 and an option premium of $15, if the price falls to $160 at expiration, investors can exercise their rights and sell to the option seller at $180, making a profit after deducting the option premium. If the price does not fall but rises, investors can choose not to exercise the option and will lose the option premium. This asymmetric risk-return characteristic makes options contracts a powerful tool for investors to hedge risks and enhance returns, especially in markets with high volatility and unclear trends, providing investors with more strategic choices.

Trading mechanism of crypto assets contracts

• Margin Trading

Leveraged trading can be described as a “double-edged sword” in the world of crypto asset contracts. It’s like attaching an “amplifier” to investors’ funds, allowing you to leverage trading funds several times, tens of times, or even hundreds of times with a relatively small amount of capital.

Suppose you only have 10,000 yuan of principal in your hand, with 10x leverage, you can control 100,000 yuan worth of cryptocurrency contracts. When the market moves in the direction you expect, for example, if you are bullish on Bitcoin, and the price of Bitcoin really rises by 10%, if there is no leverage, your profit of 10,000 yuan of principal is only 1,000 yuan; But with 10x leverage, the profit of the 100,000 yuan contract you control is 10,000 yuan, which is equivalent to doubling the principal.

However, the other side of this ‘sword’ is extremely sharp. Once the market trend is contrary to your expectations, the losses will also be magnified. Continuing with the above example, if the price of Bitcoin drops by 10%, without leverage, you lose 1000 yuan, but with 10 times leverage, you will lose 10,000 yuan, instantly losing all your capital, and even possibly owing money to the trading platform, which is called liquidation. Although leverage can amplify profits, the underlying risks are ever-present, and investors must use it cautiously, fully evaluating their own risk tolerance.

• Long and short

Long and short are extremely important profit strategies in cryptocurrency contract trading, and they are like the two ends of a balance, corresponding to investors’ different expectations of the market.

Longing, in simple terms, means that investors are optimistic about the future price increase of crypto assets. For example, through technical analysis, market information, and other comprehensive judgments, you believe that Ethereum is expected to experience a price increase in the near future. At this time, you can buy Ethereum contracts. If the subsequent Ethereum price rises as you expected, you can sell the contract, and your profit is the price difference minus fees and other costs. Just like in 2021, the Ethereum ecosystem has flourished, and many projects have been launched, driving its price to continue to rise. Investors who longed Ethereum contracts in advance have reaped substantial profits.

On the other hand, when you expect the price of a certain cryptocurrency to fall, you can take a short position. Taking Litecoin as an example, if you notice that the mining power of Litecoin is growing too fast and the market may be oversupplied, you can predict that its price will decline. At this time, you borrow a certain amount of Litecoin contracts from the trading platform and sell them. After the price drops, you buy the same amount of Litecoin contracts back at a lower price and return them to the platform. The price difference is your profit. However, it is important to note that short selling carries high risks because theoretically there is no limit to the price increase. If your judgment is wrong, the losses could be huge. During the period of continuous new highs in the price of Bitcoin, many investors who shorted Bitcoin suffered heavy losses because they went against the trend and ended up with nothing.

• Closing and Settlement

Closing and delivery are important operations in the final stage of cryptocurrency contract trading, which directly affect the final profit and loss of investors.

Closing a position, in simple terms, means that investors end their contract positions. The timing of this operation is crucial, depending on investors’ real-time judgment of market trends and their own profit or stop-loss targets. For example, if you buy a bitcoin contract and the price of bitcoin rises rapidly, reaching your predetermined profit target, you will choose to close the position in order to lock in profits and prevent the price from eroding your gains. Conversely, if the price trend goes against your expectations and the loss reaches your tolerance limit, you should close the position decisively to stop further losses. Just like in the daily fluctuations of the cryptocurrency market, investors who are keen to capture market changes and accurately grasp the timing of closing positions often survive and profit in the complex and ever-changing market.

Delivery is a unique part of futures contracts, which means that when the contract expires, the trading parties will perform actual asset delivery or cash settlement according to the conditions specified in the contract. Some contracts use physical delivery, where the buyer pays the corresponding funds at expiration, and the seller delivers the full amount of crypto assets; while more contracts use cash settlement, based on the difference between the market price at the time of expiration and the contract’s agreed price, to settle profits and losses in cash. Different crypto asset contracts have different delivery methods, so it is essential for investors to clearly understand the delivery rules of the contract before participating in the trading and make corresponding preparations in advance to avoid unnecessary losses due to negligence.

Advantages of Crypto Asset Contracts

• High Yield Potential

One of the key factors that attracts many investors to cryptocurrency contracts is undoubtedly the high potential for returns. Compared to traditional investments, it can bring remarkable returns in a short period of time.

Looking back at the development of crypto assets, Bitcoin can be regarded as a legend. In 2010, the price of Bitcoin was only a few cents, but by the end of 2017, it skyrocketed to nearly $20,000, an increase of millions of times. For those early investors who entered the Bitcoin contract trading, if they accurately seized the opportunity, made long positions, and invested a small amount of capital, they would have seen their profits grow exponentially as the price of Bitcoin soared, easily achieving explosive wealth accumulation and creating one after another myth of getting rich.

This high yield comes from the uniqueness of the crypto asset market. On the one hand, crypto assets are in the emerging industry with tremendous development potential, and new technological breakthroughs and expanded application scenarios may trigger significant price fluctuations, creating profit opportunities for investors. On the other hand, contract trading comes with leverage, further amplifying the profits from price fluctuations. Just like under the 10x leverage, if the crypto asset price rises by 10%, the investor’s profit is not just 10% of the principal, but doubled. This is out of reach of traditional investments such as bank deposits and bonds, and even compared with stock investment, during some crazy growth periods in the market, the profit potential of crypto asset contracts is even better.

• Trading Flexibility

Flexibility in trading is another significant advantage of crypto asset contracts, allowing investors to freely navigate in the ever-changing market.

First of all, the cryptocurrency market operates 24/7. Unlike traditional financial markets, it is not restricted by geography, holidays, or business hours. Investors from around the world can log in to the trading platform at any time as long as they have internet access, whether it’s during busy weekdays, late nights, weekends, or holidays, enabling them to participate in cryptocurrency futures trading. This means that investors will not miss any potential trading opportunities and can react promptly to any sudden major news or price fluctuations caused by technological changes, allowing them to adjust their investment strategies in a timely manner and buy or sell contracts.

Secondly, the long and short dual operations provide investors with more profit opportunities. In the traditional stock market, investors mostly can only profit from the rise in stock prices, i.e., going long. If the market falls, they often face losses. However, in crypto asset contract trading, investors can both go long and short. When expecting the price to rise, they can buy contracts and sell for a profit when the price goes up; they can also go short, borrowing contracts to sell when anticipating a price drop, then buying back at a lower price to return, and profiting from the price difference. This dual choice mechanism perfectly adapts to different market trends, allowing investors to seize profits through precise market judgments in both bull and bear markets.

Furthermore, there is a wide variety of crypto asset contract types, covering mainstream currencies like Bitcoin, Ethereum, Litecoin, Ripple, as well as many other unique and niche currencies. Investors can freely choose their trading targets based on their risk preferences, investment experience, and research on the prospects of different currencies. Some people are bullish on Bitcoin’s “digital gold” status and focus on Bitcoin contract trading; others are passionate about the smart contract potential of Ethereum and concentrate on Ethereum contracts. There are also investors who diversify their risks by deploying contracts for multiple different currencies, constructing a diversified investment portfolio, and capturing market opportunities comprehensively.

• Hedging Risk

In the uncertain financial market, hedging risk is a key measure for investors to protect assets and stabilize income, and cryptocurrency contracts just provide investors with such a “protective umbrella”.

Taking Bitcoin investors as an example, assuming an investor has a certain amount of Bitcoin spot and is bullish on the long-term value of Bitcoin. However, the cryptocurrency market is volatile, and the price of Bitcoin often fluctuates greatly. When there are many negative factors in the market, such as tightening regulatory policies, hacking attacks on major cryptocurrency exchanges, etc., which trigger expectations of a sharp short-term drop in Bitcoin prices, investors can use cryptocurrency contracts for hedging if they do not want to sell their Bitcoin spot holdings and bear the loss of asset shrinkage.

Specifically, investors can sell an equal amount of Bitcoin futures contracts or perpetual contracts to short when the Bitcoin price is high and facing the risk of falling. In this way, if the Bitcoin price really falls as expected, the value of the spot assets will certainly shrink, but the short contracts will profit from the lower price, and the gains and losses of the two will offset each other, successfully locking in the value bottom line of the assets and avoiding heavy losses. On the other hand, if the price does not fall but rises instead, although the short contracts will incur losses, the appreciation of the spot assets is enough to make up for this loss, and investors still retain their principal without missing out on the benefits of Bitcoin price increase.

This hedging mechanism is like adding a seatbelt to an investment portfolio. Whether facing the impact of black swan events or market cyclical adjustments, investors can cleverly balance risks and returns with crypto asset contracts, sit back and enjoy stable asset growth in the turbulent market tide.

Investment advice for cryptocurrency contracts

• Learn the basics

Before stepping into the complex and volatile world of cryptocurrency contracts, it’s important to learn the basics like the building blocks of a tall building.

First of all, it is necessary to have a deep understanding of the nature and characteristics of Crypto Assets. Understanding that Crypto Assets are based on cryptographic principles and rely on blockchain technology to achieve decentralization, anonymity, and global circulation of digital currencies. Bitcoin, as the pioneer of this field, has created a distributed ledger model that frees transactions from the centralized control of traditional financial institutions. Ethereum, on the other hand, has expanded the application boundaries of Crypto Assets with its smart contract functionality, giving rise to innovative formats such as decentralized finance (DeFi) and non-fungible tokens (NFT). Familiarity with these characteristics can help investors better grasp the underlying value and potential trends of different Crypto Assets.

Secondly, mastering the trading rules of various contracts is crucial. For perpetual contracts, it is important to fully understand the funding rate mechanism and how it dynamically adjusts market balance in the long and short game. The delivery date and delivery method of futures contracts determine the trading rhythm and final fulfillment form for investors. The unique exercise price and option fee settings of options contracts, as well as the asymmetric rights and obligations of the buyer, provide investors with flexible and diverse risk hedging and profit-enhancing strategies.

Furthermore, it is essential to be familiar with the operation process of the trading platform. From account registration, real-name authentication, fund transfer, contract trading order placement, position closing and delivery, to risk control settings such as stop-loss and take-profit, every step is crucial to the success or failure of the trade.

In terms of learning resources, there are many high-quality platforms available online. Gate.io, an encryption asset trading platform, has a dedicated knowledge and popular science section on its official website-Gate LearnExplaining crypto assets and contract trading knowledge in simple language; professional financial education websites such as Investopedia provide in-depth and systematic tutorials on crypto asset investment; many crypto asset channels on YouTube, such as ‘DataDash’ and ‘Crypto Daily’, offer real-time market analysis and case studies to help investors understand complex concepts intuitively; major crypto asset forums such as Bitcointalk and Reddit’s crypto asset section gather experience sharing and problem discussions from global investors, allowing beginners to quickly gain practical wisdom and equip themselves with a strong mindset for starting their investment journey.

• Develop trading strategies

“Where there is a plan, success follows; where there is no plan, failure ensues.” In the contract trading of crypto assets, developing a comprehensive trading strategy is the key for investors to navigate through market volatility and achieve profits.

Risk control is the core element of the strategy. Given the ultra-high volatility of the crypto asset market, investors must set a reasonable position size and avoid excessive leverage and heavy positions. For example, based on their own risk tolerance, they should control the position of a single trade within 10% to 20% of the total capital to prevent a complete loss from a single mistake. At the same time, strict stop-loss points should be set. Once the market trend goes against expectations and the loss reaches the preset ratio, such as 5% to 10%, the system will automatically close the position to stop the loss from further expanding. Taking profit is equally crucial. When the contract profit reaches the expected target, such as 20% to 50%, it is important to take profit in a timely manner to lock in profits, not be blinded by greed, and prevent the market from reversing and swallowing the profits.

Having a clear trading goal is also crucial. Investors need to determine whether they are pursuing short-term gains or long-term value growth based on their financial situation, investment horizon, risk appetite, and other factors. If they want to make short-term profits, they can take advantage of the daily price fluctuations of crypto assets, capture short-term trends through technical analysis, and trade quickly; if they are focused on the long term, such as seeing the long-term value storage potential of Bitcoin as “digital gold” or the continuous expansion prospects of Ethereum in the blockchain application ecosystem, they can adopt strategies such as regular fixed investment and long-term holding to ride out market fluctuations.

In the face of different market conditions, corresponding strategies should be adopted. In the early stage of a bull market, the overall market trend is gradually upward. At this time, it is appropriate to increase long positions, choose mainstream and potential crypto asset contracts, such as Bitcoin and Ethereum contracts, to gain profits from the upward momentum of the market. At the same time, partial options contracts can be used to further amplify profits through their leverage characteristics. If the market enters a period of volatility, with prices fluctuating within a certain range, a grid trading strategy can be adopted, buying at the bottom of the range and selling at the top to repeatedly profit from the price difference; or the use of inter-period arbitrage strategy, buying near-term contracts and selling far-term contracts to profit from the price differences of contracts with different expiration dates. In the bear market phase, with a strong bearish sentiment in the market, the focus should be on defense. A small amount of shorting can be done, or put options contracts can be bought to hedge the risks of spot trading; at the same time, holding cash and waiting for a good opportunity to bottom-fish after the market reaches its bottom.

In short, crypto asset contract trading is by no means a blind speculative game, but a game of wisdom that requires knowledge, skills, and strategies. Investors can only steadily move forward and achieve asset preservation and appreciation in this market full of opportunities and challenges through solid learning, careful selection, and careful planning.

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Conclusion

In this world of crypto asset contracts where opportunities and challenges coexist, investors can only move steadily towards wealth appreciation in the turbulent market by maintaining a clear mind, building a solid knowledge base, carefully selecting reliable trading platforms, and developing scientific and reasonable trading strategies.

Disclaimer

This content is for reference only and does not constitute investment advice. Contract trading carries high risks and may result in loss of principal. Please participate carefully according to your own risk tolerance. Trading is risky, and investment should be cautious.