What is a digital currency contract?

Digital Money contracts (also known as cryptocurrency contracts, derivatives contracts) are a type of financial product based on the digital currency market, which allows investors to invest in the price trend of digital currency through contracts without actually holding the asset. These contracts are usually provided through trading platforms, allowing investors to make higher leveraged investments.

Simply put, a digital money contract is an agreement between investors and trading platforms to predict and trade on the future price of a specific digital currency. The profit and loss of the contract are based on the fluctuation of the underlying digital currency price, and investors can earn profits by predicting price movements.

The basic principle of digital currency contracts

The basic principle of digital currency contracts is similar to traditional financial market futures contracts. The buyer and seller of the contract trade by predicting the future price of digital currency. Digital currency contracts usually have the following characteristics:

• Leverage Effect: Investors can use leverage to trade, i.e., to trade on a larger scale with a smaller capital. This means that when there is significant price volatility, investors can profit more through leverage, but it also comes with higher risks.
• No physical delivery: Digital money contract trading does not involve the actual delivery of digital money. Investors only profit or bear losses through the value changes of the contract.
• Bi-directional trading: Investors can profit not only from ‘buying long’ but also from ‘selling short’. Therefore, digital money contracts are suitable for markets with large price fluctuations, especially the digital money market.

Common types of digital currency contracts

There are many types of digital currency contracts, mainly including the following:

(1) Perpetual Contract

Perpetual contract is a contract without an expiration date. Unlike traditional futures contracts, perpetual contracts can be held indefinitely until the investor closes their position. The price of perpetual contracts closely tracks the spot price of the underlying asset, making perpetual contracts widely used in the digital money market.

(2) Futures Contracts

Futures contracts are contracts with fixed expiration dates, and investors need to settle at the expiration of the contract. The price fluctuations of futures contracts are influenced by multiple factors such as market supply and demand, news events, market sentiment, etc., so their trading strategies are relatively complex.

(3) Contract for Difference (CFD)

Contract for Difference (CFD) is essentially a financial derivative where investors trade contracts based on the price fluctuations of underlying assets such as digital money. The profit is derived from the difference in price. This tool allows investors to speculate on price differences without the need to buy or sell actual digital money. Investors make investments by predicting price fluctuations. CFD contracts are typically used for short-term trading and are suitable for investors who are sensitive to market volatility.

How to conduct digital money contract trading?

The steps of digital currency contract trading usually include the following aspects:

(1) Choose a trading platform

First, you need to choose a digital money trading platform that supports contract trading. Currently, many platforms (such as Gate.io) offer contract trading services. When choosing a platform, pay attention to factors such as trading fees, leverage ratios, liquidity, and platform security.

(2) Open a contract account

After selecting the platform, you need to open a contract account. This is different from a regular spot account, as the funds in the contract account are used for leverage trading. In Gate.io, you need to transfer a certain amount of funds to the contract account.

(3) Select contract type and trading pair

Choose the appropriate type of contract (such as perpetual contract, futures contract, etc.) and trading pair according to your investment needs. Different types of contracts have different trading rules, and investors need to understand them clearly.

Image:https://www.gate.io/futures/USDT/BTC_USDT

(4) Set Leverage and Position

In digital currency contract trading, leverage is very important. The higher the leverage, the greater the risk and potential gains. Investors need to choose the appropriate leverage ratio according to their risk tolerance.

(5) Placing Orders and Trading

After selecting the contract and leverage, you can choose to go long (predicting price increase) or go short (predicting price decrease) to place an order. Based on market conditions, you can choose different order types such as limit orders and market orders for trading.

(6) Risk Management

Risk management is crucial in the trading process. Proper take profit and stop loss settings can help investors control risks and reduce unnecessary losses.

Click to view the entry to advanced tutorial on contracts

https://www.gate.io/en/futures/trading-guide-for-beginners

Risk Management in Digital Money Contract Trading

The high leverage nature of digital currency contract trading makes it relatively risky. Here are some common risk management methods:

(1) Stop Loss Setting

Stop loss is a strategy that limits losses by setting price thresholds. If the market price develops in an unfavorable direction, the stop-loss order will be automatically executed to reduce losses.

(2) Fund Management

In contract trading, fund management is very important. Investors should not put all their funds into a single contract, but should allocate them reasonably to prevent large losses in case of severe market fluctuations.

(3) Use leverage with caution

Although leverage can amplify profits, it can also amplify losses. Therefore, investors should carefully select the leverage ratio to avoid excessive leverage and increase risk.

(4) Risk Warning and Monitoring

In contract trading, investors should always pay attention to market dynamics, especially when there are significant fluctuations in the digital money market. A reasonable market alert system and monitoring tools can help investors respond to emergencies in a timely manner.

The advantages and challenges of digital currency contract trading

Advantages:

• The high potential of high returns brought by high leverage: Contract trading allows investors to leverage larger market trades with less capital, amplifying returns.
• Two-way trading: you can long or short, and enjoy the profit opportunities brought by market fluctuations in any direction.
• 24/7 Market: The digital money market operates around the clock, and contract trading can also be conducted at any time.

Challenge:

• High Risk: While leverage can bring high returns, it can also amplify losses. The market’s violent fluctuations can lead to rapid losses for investors.
• Complex Market Mechanism: Contract trading requires investors to have certain market analysis capabilities, and beginners are easily confused by complex trading rules.
• Platform risk: There are risks in the security and compliance of the trading platform, and investors should choose carefully.

Closing Remarks: How to Safely and Efficiently Conduct Contract Trading?

Digital currency contract trading is an investment method that can bring both high returns and high risks. As a beginner, it is important to understand the basic concepts of contracts, operational processes, and risk management strategies. Only by fully understanding the contract trading mechanism, market fluctuations, and risk control can you invest safely and efficiently. Through continuous learning and practice, you will be able to gain more opportunities and returns in digital currency contract trading.