Since the beginning of 2021, there has been a massive cascade of liquidations from future trading in the cryptocurrency market. According to glassnode on January 4, an on-chain analytics resource via their Twitter handle said that a futures trader which long positions lost a total of $190 million on Binance within 10 minutes – which is the highest in history.
While on January 11,2021, over $2.7 billion worth of futures contracts were totally liquidated according to the data from Bybt. This was caused by the large drop in the price of bitcoin within a short time frame as it plunged from over $41,000 to under $32,600.
The liquidation cascade reactions has not ended yet. Another data from Bybt.com, as reported by Cointelegraph on January 17, over $500 million worth of positions were liquidated, and this heart-breaking liquidation occurred right before the price of Bitcoin $BTC slid below $34,000.
Popular Binance whale trader, Gaius Chibueze, who’s also the founder Tatcoin – an African based cryptocurrency,vis his Twitter handle, voiced his opinion on the risk crypto futures trading poise to many African traders. This is becoming an increasing concerns in the African cryptocurrency space, as new traders without the requisite knowledge of what futures trading entails – the risks, are losing hard earned money to it. This could serves as a huge threat against the mainstream adoption of cryptocurrency at large.
Getting started with crypto futures trading
Futures is simply an agreement to buy or sell an asset at a future date for a predetermined price or an agreed-upon price. This allows traders to speculate on the price of cryptocurrency. It is also known as a derivative instrument whose value relies on an underlying asset – digital token.
In every form of investment or trading, there are risks involved. But, if it is properly managed, the gains will supersede the loss incur from risks in which futures trading is not left out.
Trading futures might seem easy on the surface but it is inherently risky and requires that new traders or investors are not only familiar with all the risks but also possess the skills to manage those risks.
Many new traders tend to borrow a large amount of money to trade the futures market since they do not have large capital and it is the only way to magnify relatively small price movements to potentially create profits. But borrowing money also increases risk.
The movement of the market against the trader can lead to massive liquidation of their accounts which may also nullify their investments.
Important things to know before venturing into cryptocurrency futures trading
Cryptocurrency education
The place of cryptocurrency education can not be overemphasized. New traders are expected to learn and become proficient in spot trading before moving on to futures, because trading futures comes with high risk.
Binance Africa influencer for 2020, Chris Ani, who’s also the founder of a digital skill acquisition hub, Daba.school, on this Twitter handle cautioned new cryptocurrency traders to avoid trading crypto futures in the name of becoming the youngest millionaire overnight but rather be focused on learning cryptocurrency trading and mastering the basics such as spot trading, OTC trading, Peer to Peer(P2P) before going into futures.
Chris, further advise new traders to avoid getting rich-quick mentality, greed, and stop being distracted by whales or big traders’ screenshot of 200%+ trade gains.
Trading Plan/Strategy
There is no perfect trading strategy, but traders need to carefully draft out the one that works best for them. Sticking by a trading strategy enables the trader to note the analysis that can be implored next or better still removed.
Learn Risk Management
Due to the gravity of inherent risks in futures trading, traders are advised to incorporate risk management strategies into their trading plan. A popular rule in cryptocurrency trading says: “Do not risk more than you can afford to lose.”
Traders should always set stop-loss and take-profit levels. Stop-loss levels are levels that traders could set for automatically closing those trades that end up making losses while Take-profit levels are responsible for closing the profit-making trades before the trend changes.
This helps to prevent risks of unexpected market changes especially when the trader is not in the front of the screen.
