Common Mistakes in Crypto Derivatives Trading and How to Avoid Them

The popularity of crypto derivatives trading has shot up over the last couple of years, as more investors recognize the lucrative opportunities presented by the crypto space and hope to take advantage of the soaring price of Bitcoin and the steady growth of various altcoins.

Before we examine some common crypto trader mistakes and how to avoid them, let’s have a look at what crypto derivatives are, how they work and why there have become so appealing to investors.

What are crypto derivatives?

What are crypto derivatives

Crypto derivatives are contracts to buy or sell a specific digital currency at a given time in the future, for a pre-set price. The worth of the contract is derived from the underlying value of the crypto asset. Any shift in the value of the underlying asset over the duration of the contract will directly impact your profit margin.

Now, with the basic concept of crypto derivatives explained, let’s see why they have attracted so much interest. What makes crypto derivatives trading so attractive is the low commissions, sky-high liquidity, and extreme volatility as well as the generous leverage that enables traders to open a position more than a hundred times the size of their investment. This is particularly true of BTC perpetual swaps, where the settlement of a BTC/USD futures contract is in the base currency, Bitcoin, as opposed to being in dollars.

So, where does the danger lie and what are the biggest crypto trader mistakes to be avoided?

Be careful not to over-leverage

over-leverage crypto

Almost every crypto derivative exchange will enable you to access leverage of around 100:1, meaning that for every 1 BTC you invest, you can control a market position worth 100 BTC. Appealing as this may seem, the risks are staggering. If for example, the Bitcoin price moves just one or two percent, while you could grow your capital massively as a result, you could also lose everything in no time at all.

One of the worst crypto trader mistakes that you can make is to over leverage, particularly when you consider the exceptionally high volatility of the digital currency markets. Keep your leverage down to give yourself more breathing room and ensure you have a buffer against liquidation if the crypto market doesn’t go your way. Stick to a safe 5%-10% so that a major market spike won’t suddenly wipe you out.

Use a conservative stop-loss

A stop loss is a risk management tool that enables you to exit a trade automatically, if the asset hits a certain price, so as to mitigate your losses. This is a critical tool for anyone trading bitcoin as derivatives, since the high volatility of the crypto market can lead to rapid, unpredictable price shifts.

When you trade on an exchange or using a crypto derivative trading platform there will often be a liquidation price, at which an position will be liquidated before it can hit bankruptcy. So, another potentially costly crypto derivatives trader mistake is to use your liquidation price as a stop-loss when trading derivatives on cryptocurrencies, as your losses will end up being much higher and your capital will drain away. Use a conservative stop-loss order and don’t allow auto-liquidation to drain your capital.

Use limit (maker) orders

limit orders in crypto trading

When it comes to crypto trader mistakes, one of the most common relates to impatience. Many traders want to execute their trades as fast as possible and see their return instantly. However, to boost liquidity, a number of derivatives exchanges offer rebates for limit orders, also known as maker orders. These orders are not immediately filled. Rather, you set a limit order, which is added to the order book to subsequently be filled by another trader, who meets your pre-set price. This can result in better prices if you anticipate the market direction correctly and significantly reduce your trading fees over the long run.

The best way to avoid the dangers of crypto derivatives trading

automated crypto arbitrage platform arbismart

If you want to earn a high profit from your Bitcoin and Ethereum, without the risks of crypto market volatility, or the dangers of missing an opportunity, when you have to step away from your screen, your best option is crypto arbitrage.

Crypto arbitrage is widely considered to be one of the lowest-risk forms of investing as it is not vulnerable to crypto market fluctuations. Instead, it exploits instances where, temporarily, a currency is available at different prices at the same time across exchanges. Here at ArbiSmart, our fully automated crypto arbitrage platform scans 35 exchanges 24/7, to find and take advantage of these inefficiencies that, often, only last a matter of minutes. The platform buys the coin on the exchange where the price is lowest and then sells it at the highest available price to make a profit on the spread, before the temporary price difference resolves itself.

All you need to do is sign up, deposit funds and the platform does the rest, for profits ranging from 10.8% to 45% a year depending on the size of your investment. Unlike trading derivatives on cryptocurrencies, crypto arbitrage offers steady, reliable, guaranteed returns. At ArbiSmart, you can look at our Accounts page, and know in advance, exactly how much you can expect to make on a monthly and annual basis. In addition, our platform is fully EU licensed and regulated, ensuring a secure, trusted trading environment where client accounts are safeguarded against hacks and fraud.

As we can see, the crypto derivatives market can be extremely lucrative and dynamic, but the inherent volatility and subsequent high risks can lead to the loss of all your capital. Crypto arbitrage therefore offers a secure, reliable alternative that doesn’t require you to compromise on profits. To learn more about the world of cryptocurrencies in general, check out the rest of the ArbiSmart blog, or go to our Arbitrage page to get more information on the pros and cons of crypto arbitrage investing.