Crypto contract trading, also known as cryptocurrency derivatives trading, is a financial market activity where participants speculate on the price movements of digital assets without actually owning them. Instead of buying or selling the physical asset, traders enter into contracts, often referred to as derivatives or futures contracts, that derive their value from the price of the cryptocurrency.
How Institutions Earn on Cryptocurrency Contract Trading
With the growth of institutional participation in the crypto sector, crypto contract trading reached new heights, attracting companies and funds to this risky yet profitable strategy. On the other hand, there is another way for institutions to earn – participate in a Crypto Market Maker Program on one of the crypto institutional platforms and provide its liquidity. Platforms, in turn, may use the received liquidity to provide futures contract trading for other participants, rewarding the market maker for the added liquidity. Let’s take a closer look at how cryptocurrency contract trading works from the position of institutions.
Crypto Contract Trading for Institutions
Institutional crypto contract trading refers to the practice of large financial institutions, such as hedge funds, asset management firms, and investment banks, engaging in cryptocurrency derivative trading on a significant scale. These institutions utilize sophisticated trading strategies and substantial capital to trade crypto contracts and derivatives in various forms, including futures, options, swaps, and more.
Here’s an example to illustrate institutional cryptocurrency contract trading. A major asset management firm with billions of dollars in assets under management decides to diversify its portfolio by incorporating crypto derivatives into its trading strategy.
Here are the steps involved:
- Research and strategy formulation. The team of financial analysts, data scientists, and blockchain experts conducts thorough research on the crypto market. They identify Bitcoin as a potential asset for trading due to its high liquidity and market prominence. They also believe that BTC’s price will increase in the short term.
- Risk management. The company establishes a risk management strategy to protect its capital. This includes setting stop-loss orders, position limits, and margin requirements.
- Selection of an institutional crypto exchange. The company selects a reputable crypto derivatives exchange that offers BTC futures contracts. They ensure the exchange complies with regulatory standards and provides the necessary tools for institutional trading.
- Position sizing. The company’s management calculates the size of its BTC futures position based on its risk tolerance and portfolio diversification goals. They decide to enter a long (buy) BTC futures position with a notional value of $10 million.
- Execution. Using the contract trading platform, the team places the order for the BTC futures contract.
- Monitoring and adjustment. The company monitors the BTC futures market, staying updated on news, technical analysis, and other factors that might affect the price.
- Profit realization. As BTC’s price rises in line with their expectations, the company decides to exit the futures position and take a profit. They sell the futures contract at a higher price than their entry point.
So we have discussed how institutions can earn on cryptocurrency contract trading. The example represents the steps the company should take and the research capabilities and risk management expertise it should possess to succeed in contract trading. By doing so, they diversify their portfolio and potentially profit from the price movements of Bitcoin.