What are the differences between stock futures and cryptocurrency futures?

The futures market experienced solid growth in 2024, and it’s expected to continue in the same direction this year as technological development supports innovation and investor interest. Since futures contracts can empower any industry, from the agricultural to the energy sector, those interested can secure the price level of these assets, as the contracts allow the parties involved to postpone fulfillment until the agreed date in the future. 

The market also includes two of the most critical and emerging sectors: stocks and cryptocurrencies. Stock futures are cash-settled contracts that represent the value of a particular stock market index. On the other hand, crypto futures are a relatively recent development. Still, they share a similarity that allows investors to speculate on the future prices of these digital assets, such as BTC futures. 

With several similar aspects and differences, these futures contribute to an evolving market, so let’s learn more about them. 

How do futures contracts work? 

Futures contracts are valuable assets as investors leverage them for hedging against price volatility or to speculate on price movements. This is also why they’re set between two parties for buying or selling the asset when it reaches a predetermined price in the future. The buyer takes the long position, while the seller holds the short position in the trade, and they work based on their commitment to buy or sell the asset. 

On stock futures

Stock futures, also known as derivative contracts, are widely leveraged by institutional investors and traders seeking to manage risks associated with price volatility. Users of stock futures don’t have to own the stock to benefit from them, which is what makes futures so well-received. Some of their features include the following:

• Stock or stock market indices like S&P 500 offer them value; 
• Operating based on regulations from traditional financial authorities; 
• High liquidity derived from investors’ active participation;
• Physical delivery or cash settlement depending on specifications;

On crypto futures

Cryptocurrency futures have been booming lately following the introduction of the first Bitcoin futures asset. Soon after its success, Ethereum futures, as well as XRP and Solana futures, became available through the CME Group. These derivatives are based on their future prices, allowing investors and traders to speculate on price movements. Compared to the stock market, the crypto futures sector has more liquidity, but there are many other aspects to consider:

• Their value comes from the underlying cryptocurrency, like Bitcoin and Ethereum; 
• Their regulation landscape varies based on jurisdictions; 
• Their market hours operate 24/7, unlike traditional ones that have specific timeframes; 
• They’re settled in cash primarily; 

What to know before choosing a futures sector

Whether you’re an investor or trader, you may be interested in futures due to their many benefits, including liquidity, portfolio diversification, and low costs for execution. As a beginner, you may want to start by speculating on stock asset’s features as their markets are established and more mature. On the other hand, professional users can dive into the world of crypto stocks as the relatively new sector is less predictable. 

Cryptocurrencies are generally more volatile than stocks, but this volatility also depends on the specific asset. Bitcoin, for example, has gained more control over the years, while lesser-known altcoins are still experiencing significant price fluctuations. Their nature also makes it difficult for governments to have a proper regulation in place, contributing to the fragmented sector. 

Finally, stock markets are tied to specific hours for each asset and industry, whereas cryptocurrency futures can be traded anywhere and at any time. This allows for more flexibility and increased opportunities to evolve your portfolio. 

What about option markets?

Along with futures, investors and traders can also leverage the benefits of options, which are similar derivatives. The difference is that the buyer can, but is not obliged, to buy or sell the asset before the contract expires. Therefore, if market conditions are not beneficial for them, users can allow the option contract to expire and limit the potential losses. 

When traders expect prices to increase, the assets are known as “call options,” whereas when the prices are expected to decline, traders refer to them as “put options.” These terms enable investors to adjust their strategies in a timely manner and manage market risks, particularly in the cryptocurrency sector. 

While both futures and options offer the opportunity to participate in trading without taking ownership, options are less risky, but they require an upfront premium. At the same time, users can exercise these contracts anytime before expiration. On the other hand, futures have higher risks, and users must buy or sell them based on contract terms. Indeed, they provide higher rewards. 

Learning how to trade each asset 

Depending on your goal as a trader, you can adjust your strategies to benefit from the highest profits. For example, if you want to generate income from options, whether stock or crypto-based, you may need to approach a covered call writing, in which you write calls on assets from your portfolio. 

On the other hand, if you want to use them to reduce the downside risks of an asset’s position, you can buy a put option and sell another at a lower strike price. Finally, in trading options for speculation, you could buy a call option instead of buying fully into a long position. 

When it comes to futures, goals are similar, only that futures are also great for portfolio diversification, as they allow exposure to unique assets like oil or precious metals. With a proper trading plan, you can employ long, short, or spread strategies as leading approaches, as they enable you to choose from diverse financial contracts and benefit from a cost-effective hedge against volatility. 

Final considerations 

When it comes to futures contracts, investors and traders choose to benefit from prices without owning the underlying assets. Contracts on company stocks tend to be safer, whereas those based on cryptocurrencies might be riskier due to volatility but also offer profit opportunities. Traders can also explore option markets, which are contracts suitable for beginners and those who want to gradually get accustomed to the dynamic market.