RISK MANAGEMENT
IN CRYPTO SQFs

Newly released Spot-Quoted futures (SQFs) offer a new way to gain exposure to the crypto markets. This article will explain the role of these derivative instruments when trading crypto as underlying assets.

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Spot-Quoted crypto futures from the CME Group offer a new way of gaining exposure to the crypto markets.

They come with a range of innovative functionality features which differentiate them from traditional futures. Developing a full understanding of how they work is crucial before using them to navigate the crypto sector.

What Are Spot-Quoted Crypto Futures (SQFs)

Spot-Quoted crypto futures are a new type of futures contract which are in many ways similar to traditional futures, but also have a range of distinct features.

Like traditional futures, SQFs are derivative instruments. If you take a long position in the Spot-Quoted Bitcoin future, you wouldn’t own any crypto outright, but the value of your position would be determined by the value of the underlying asset.

Unlike traditional crypto futures, SQFs track the spot price of underlying crypto markets such as Bitcoin (BTC) and Ethereum (ETH). That makes monitoring price moves and P&L swings more intuitive than with traditional futures.

There are other features of SQFs which make them worth considering:

• More intuitive pricing: Crypto SQFs differ from traditional futures in that they track the spot price in the market for the underlying asset.
• Smaller contract size: Smaller contract size allows trading with less exposure.
• Standardised contracts: SQFs are a standardised agreement to buy or sell an asset at a set price on a specific future date.
• Centralised clearing: SQFs are traded on the CME exchange and processed by CME Clearing.

How To Use Crypto SQFs

Crypto SQFs offer a way to gain exposure to the crypto markets. The derivative nature of SQFs also allows investors to sell short and use leverage. These functionality features may appear advantageous, but come with significant risks.

• Short Sales: Losses on short positions are theoretically infinite as there are no barriers to market price rising, whereas losses on long positions are capped at the price of an asset reaching zero.
• Leverage: Leverage involves taking exposure which is multiple times your initial stake and magnifies both potential profit and losses.

Additional Risks of Trading Crypto SQFs

There are additional risk factors associated with the futures market which need to be considered. Some of these are amplified by the price volatility and liquidity found in the crypto markets.

Extreme Volatility

Cryptocurrency markets are known for their above average levels of price volatility. When combined with the fact that SQFs can be traded on margin, this volatility is magnified considerably.

That can make it harder to manage positions and traders can suffer from psychological biases which cause them to make ill-advised decisions.

Past performance is not an indication of future results.

Liquidation Risk

Perhaps the most significant risk in crypto SQF trading is forced liquidation. When trading on margin, you must maintain a minimum amount of collateral to keep your position open.

If market movements push your margin level below this threshold, exchanges automatically close your position to prevent further losses and ensure they can recover funds. This liquidation typically happens at the worst possible price and includes fees.

Integrating Spot-Quoted Crypto Futures into a Portfolio

Spot-Quoted crypto futures can serve different functions within a portfolio and integrating them into your strategy planning brings both advantages and disadvantages.

The ability to use leverage does allow for capital efficiency; and shorting functionality allows you to take a directional position should you think crypto markets are overheating. At the same time, trading using margin magnifies losses as well as gains and involves costs and liquidation risk.

Final thoughts

Spot-Quoted crypto futures are a new product which may be attractive. Their neat functionality makes them a potentially useful tool for those looking to gain exposure to the crypto markets. But using derivatives to trade crypto is an approach which would require extensive risk management.

Visit the eToro Academy to learn more about the different ways to manage risk.

FAQs

How do I choose which crypto SQF to buy?

Crypto SQFs track the price of an underlying instrument, therefore, analysis of any potential opportunities or risks will relate to the coins themselves. When considering the prospects of the major coins, you could factor in potential price drivers such as the Bitcoin four-year cycle and the Ethereum Roadmap.

Will my broker tell me if my position is closed out due to a margin call?

This may vary depending on the broker you choose. Some provide notifications when positions approach margin call levels or if a liquidation occurs, and many offer account alerts in different formats (such as email, app notifications, or platform pop-ups). However, it remains the trader’s responsibility to monitor margin levels and manage positions proactively, as brokers cannot guarantee advance warning in all situations. You should also ensure that you understand the relevant Terms and Conditions before starting to trade.

Does hedging my crypto position using SQFs eliminate risk associated with long single positions in other cryptos?

It is extremely unlikely that a selected SQF short position, which acts as a “hedge,” will eliminate all of the market risk associated with your other crypto positions. While you may hold both long and short positions, the instruments may not perfectly offset each other, and there can be differences in timing or magnitude of price movements. In practice, hedging is generally used as a way of mitigating risk and something which allows you to maintain a degree of composure and put you in a position to make considered decisions, but it does not guarantee protection from losses.

Spot Quoted Futures involve significant risk and are not suitable for all investors. 

You may lose more than your initial investment due to the underlying assets’ price volatility. 

Please ensure you understand the risks involved.

Crypto investments may not be appropriate for retail investors and the full amount invested may be lost. It is important to read and understand the risks of this investment, which are explained in detail at this here https://etoro.tw/3PI44nZ