In the volatile world of cryptocurrency, prices can swing dramatically. While many investors focus on buying low and selling high, there's another way to potentially profit: contract trading. This method allows you to benefit from both rising and falling markets, including periods when Bitcoin's price is declining.
This guide explains the fundamentals of contract trading, walks you through the process step by step, and answers common questions to help you navigate this advanced investment strategy.
What is Contract Trading?
Contract trading is a derivative strategy where traders agree to buy or sell an asset—like Bitcoin—at a predetermined future price. Unlike simply holding cryptocurrency, contracts allow you to speculate on price movements without owning the underlying asset.
There are two primary types of contracts: delivery contracts and perpetual contracts.
Delivery Contracts
Delivery contracts have a set expiration (or delivery) date. When the contract expires and remains open, it is automatically settled based on the average index price from the last hour before expiry. These contracts are often categorized by their settlement timeframe:
- Weekly contracts
- Bi-weekly contracts
- Quarterly contracts
- Bi-quarterly contracts
Perpetual Contracts
Perpetual contracts, as the name implies, do not have an expiration date. To keep the contract's price aligned with the spot market price, a funding mechanism is used. If more traders are long (betting on a price increase), they pay a funding fee to those holding short positions. Conversely, if more traders are short (betting on a price decrease), they pay the funding fee to the longs.
Furthermore, each contract type can use different forms of collateral, or margin:
- USDT-Margined Contracts: Use the stablecoin Tether (USDT) as collateral for all positions.
- Coin-Margined Contracts: Use the base currency of the trading pair (e.g., BTC) as collateral.
This choice gives traders flexibility in how they manage their capital and exposure.
A Step-by-Step Guide to Contract Trading
Step 1: Account and Transaction Setup
Before you begin, you must configure your account for trading.
- Enable and set your account to either Single-currency margin mode or Multi-currency margin mode.
- You can then customize additional settings, such as your preferred trading units and order type preferences.
Step 2: Trading Delivery Contracts
Delivery contracts are available as both USDT-margined and coin-margined. Here, we use a coin-margined weekly contract as an example.
- Transfer Assets: Move your digital assets from your funding account to your trading account. Skip this step if your assets are already there.
- Select Contract: On the trading page, click the dropdown menu next to the currency pair. Search for your desired cryptocurrency, select "Delivery" under margin trading, and then choose the weekly, bi-weekly, quarterly, or bi-quarterly coin-margined contract.
- Place an Order: Select your account mode and order type (e.g., limit or market order). Enter your desired price and amount. Click "Buy/Long" if you believe the price will rise or "Sell/Short" if you believe it will fall. You can cancel any unfulfilled orders.
- Monitor Position: Once your order is filled, you can view key data in the positions tab, including margin used, profit and loss (P&L), yield, and estimated liquidation price.
- Manage Risk & Close: In the positions tab, you can set take-profit and stop-loss orders. To close a position manually, enter a closing price and amount, or use a market order to close the entire position instantly.
Step 3: Trading Perpetual Contracts
Perpetual contracts are also available with USDT or coin margin. Here, we use a USDT-margined perpetual contract as an example.
- Transfer Assets: As with delivery contracts, ensure your assets are in your trading account.
- Select Contract: On the trading page, use the dropdown menu to find your cryptocurrency. This time, select "Perpetual" under margin trading and choose the corresponding USDT-margined contract.
- Place an Order: Choose your parameters and execute a long or short order, just as you would with a delivery contract.
- Monitor Position: Track all your position metrics in real-time.
- Close Position: Use stop-loss, take-profit, or manual closing orders to manage your trade.
Whether the market is going up or down, contract trading provides a toolkit for potentially capitalizing on price movements. 👉 Explore more strategies to enhance your trading approach.
Frequently Asked Questions (FAQ)
Q: Can I really make money if Bitcoin's price is falling?
A: Yes, that is the primary advantage of short selling with contracts. By opening a short position, you profit if the asset's price decreases. Your gain is essentially the difference between the price at which you opened the short and the lower price at which you close it.
Q: What is the difference between a stop-loss and a liquidation?
A: A stop-loss is an order you set to automatically close a position at a specific price to limit your losses. Liquidation is an automatic, forced closure of your position by the platform when your losses reach a level where your remaining margin can no longer cover the position, preventing further losses.
Q: Is contract trading riskier than simply buying and holding crypto?
A: Yes, it carries significantly higher risk. While buying and holding (or "HODLing") exposes you to the asset's price volatility, contract trading often uses leverage, which can magnify both gains and losses. It is possible to lose more than your initial investment.
Q: What does 'leverage' mean in contract trading?
A: Leverage allows you to open a position much larger than your initial capital deposit (margin). For example, 10x leverage lets you control a $1,000 position with only $100. While this amplifies potential profits, it also dramatically increases the risk of swift losses.
Q: How important is risk management in this type of trading?
A: Risk management is absolutely critical. It is the most important skill for a contract trader. Always use tools like stop-loss orders, only trade with capital you can afford to lose, and never risk too much of your portfolio on a single trade.
Q: Should beginners try contract trading?
A: Beginners should approach contract trading with extreme caution. It is essential to fully understand the mechanisms, risks, and strategies involved before committing real capital. Most experts recommend practicing with a demo account first and starting with very small, low-leverage positions.