3 Major Mistakes to Avoid When Trading Crypto Futures and Options

Leverage and hedging strategies are powerful ways to use derivative contracts, but traders usually succumb to these three major mistakes.

Novice traders are generally drawn to the futures and options markets because of the promise of high returns. These traders watch influencers post incredible gains, and at the same time, the multiple advertisements of derivatives exchanges that offer 100x leverage are sometimes irresistible to most.

While traders can indeed increase their earnings with recurring derivative contracts, a few mistakes can quickly turn dreams of outsized gains into nightmares and an empty account. Even experienced investors in traditional markets fall victim to problems unique to cryptocurrency markets.

Cryptocurrency derivatives work similarly to traditional markets, as buyers and sellers enter into contracts dependent on an underlying asset. The contract cannot be transferred between different exchanges, nor can it be terminated.

Most exchanges offer options contracts that are priced in Bitcoin (BTC) and Ether (ETH), so the gains or losses vary depending on the price fluctuations of the asset. Options contracts also offer the right to buy and sell at a future date at a predetermined price. This gives traders the ability to build leverage and hedging strategies.

Let's look at three common mistakes to avoid when trading futures and options.

Convexity can kill your account

The first problem traders face when trading cryptocurrency derivatives is called convexity. In this situation, the margin deposit changes in value as the price of the underlying asset fluctuates. As the price of Bitcoin increases, the investor's margin increases in terms of US dollars, which allows for additional leverage.

The problem arises when the reverse movement occurs and the price of BTC crashes; therefore, the margin deposited by users decreases in terms of US dollars. Traders often get too excited when trading futures, and positive headwinds reduce their leverage as the price of BTC rises.

The main takeaway is that traders should...