Contract trading, often a form of derivatives trading, allows investors to contract for the future price of the asset without having to hold the asset directly. Unlike spot trading, contract trading does not involve the actual delivery of assets, but involves buying or selling contracts to achieve a profit or loss. This transaction method is widely used in various financial markets, including cryptocurrencies, stock markets, commodities, etc.
Core characteristics of contract trading:
- Leverage: Contract trading often involves leverage, which is borrowed to amplify an investors trading size. For example, with 10 times leverage, investors can pay only pay 10% of the money to control a trading position worth 10 times the amount. This makes contract trading with higher yield potential, but also with higher risk.
- Long and short: Investors can not only make profits from rising prices by buying contracts (long), but also profit from falling prices by selling contracts (short). This provides more investment opportunities for the market.
- No real asset delivery: Unlike spot trading, contract trading aims to generate gains through changes in market prices, rather than actually holding assets. This means that contract traders can avoid the storage and transportation costs of holding assets.
Specific example of contract trading: Assuming youre optimistic about the price of bitcoin, expect its price to rise. You decide to buy a Bitcoin contract. Assuming the current price of bitcoin is $20,000, you bought a bitcoin contract at $20,000. If the price of bitcoin rises to $22,000, you can make a $2,000 profit from selling contracts.
On the other hand, assuming you expect the price of bitcoin to fall, you can profit by shorting contracts. For example, Bitcoin is currently priced at $20,000, and you decide to go short. If bitcoin drops to $18,000, you can buy a round around for a lower profit of $2,000.
Risk warning: Although contract trading has high yield potential, it is also accompanied by high risk due to the use of leverage. If market prices move in a negative direction, investors may face large losses or even lose all their principal. Therefore, when participating in the contract trading, investors need to have a strong market analysis ability and strictly control the risk.