The truth about futures contracts in the currency circle

Futures contract is a common investment method in the field of digital currency investment, and it is also a very controversial trading method.

Starting today, I will use a series of articles to introduce the truth about futures contracts in the currency circle and the various big pits hidden in them.

A futures contract is an agreement in which the buyer agrees to receive an asset at a specified price after a specified period of time, and the seller agrees to deliver an asset at a specified price after a specified period of time. The price that both parties agree to use in future transactions is called the futures price. The specified date on which the two parties must enter into a transaction in the future is called the settlement date or delivery date. The asset that the parties agree to exchange is called the "underlying item."

If an investor "acquires" a certain amount of an asset in the market by buying a futures contract (that is, agreeing to buy it on a specified date in the future), it is called a long position or doing long on futures. Conversely, if an investor "sells" a certain amount of a certain asset in the market by selling a futures contract, it is called a short position, or shorting on futures.

In order to provide traders with greater trading flexibility and attract traders to participate in futures trading, traders who provide futures trading will also provide financing services, allowing traders to use small funds to invest several times the original amount, in order to Expect to obtain a rate of return that fluctuates several times relative to investment products. In fact, this is equivalent to the dealer lending money to the trader, allowing the trader to use more principal to participate in the transaction. This is what we often call leverage - using a small amount of money to leverage big money.

For example, we can understand leverage in this way: For example, if the principal of a trader is only 10,000 yuan, if the investment product increases by 10%, the profit that the trader can get from the principal of 10,000 yuan is only 1,000 yuan. If the dealer lends money to the trader, for example, borrowing 40,000, the principal of the trader participating in the transaction will become 50,000. If the increase of the investment product is still 10%, the income of the 50,000 principal becomes 5,000. Since the real principal of the trader is only 10,000, but under the same increase, the income has changed from 1,000 to 5,000. So let's say the leverage on this trade is 5x.

But in this process, the dealer lent his own money to the dealer, so the dealer also has to carefully protect his principal and not lose money. Therefore, during the transaction process, the trader must keep an eye on the changes in the transaction price to ensure that once the trader’s principal is lost, the transaction must be terminated immediately to prevent the loss from expanding and thus losing his principal. This method of terminating the transaction to ensure that the trader does not lose the principal is called "forced liquidation".

In the above example, the trader’s own principal of 10,000 plus the principal of 40,000 provided by the trader, the total principal involved in the transaction is 50,000. Therefore, once the 50,000 principal loses 10,000 and only 40,000 is left, the trader has to force liquidation and sell the futures contract in hand to ensure that his principal does not lose.

Of course, in the actual transaction, the trader will not wait until the loss of 10,000 before forcing the liquidation, but will remind the trader when the loss is 5,000, or continue to make up money, or sell the contract; when the loss reaches 9,900, some Maybe the dealer will force the position to be closed, leaving a certain space to ensure the safety of the principal.

If the principal of 50,000 loses 10,000, the trader will execute forced liquidation to make the trader lose all his money. At this time, the decline of investment products is only 20%. However, if an investor only trades with his own 10,000 principal and does not use the leverage provided by the dealer, if he wants to lose the principal, the investment product will have to fall by 100%. Compared with under 5 times leverage, as long as there is a 20% drop, investors will lose their principal. Leverage also magnifies investors' risk by 5 times.

This is where the risk of leveraged trading lies. The higher the leverage ratio, the higher the risk while enjoying high returns.