Crypto market is wildly erratic, and, at times, even the most optimistic predictions have failed. It’s not just the altcoins but even the legacy coins too that have suffered steep crashes in the crypto scene time and again. What if you are counting on the rally of your chosen crypto after 3 months but the coin takes a completely opposite direction in real-time? Well, in that case, forward trade could be your savior. To understand the forward trade, you need to have a clear understanding of the spot exchange rate as well. Check out more at multibank.io.
The post below will shed light on forward rate calculation but prior to that let’s have a clear understanding of the forward trade as well as spot trade in crypto.
Forward and spot trade
Forward as well as spot trade in crypto takes place in the same way these trading operations are executed in the traditional trading scene. It’s just that the asset in question is different here.
In spot trading, the trading parties agree to execute the trade based on an on-the-spot rate. The trade is also executed immediately and the payment is made upfront. The delivery of the offering might take 3 days in the traditional trading scene. However, since the crypto spot market is open round-the-clock, the delivery can take place within 24 hours only.
In forward trade, the trading parties agree to trade on a particular date in the near future, say after 2 months, on the 10th. In regard to the price, the trading parties negotiate a price for the future trading date based on speculation and market study. The current spot exchange rate plays a significant role here as it helps the trading parties to make an informed decision about the probable price of the crypto asset in the future.
On the predetermined day of the trade, the crypto asset will be traded at the agreed price, regardless of the spot exchange rate of the asset on that particular date.
Calculating forward rate
Now, it’s clear to you why forward traders need to take into account the spot exchange rate for calculating the forward rate. Here is a very basic calculation of the forwarding trade rate-
To calculate the forward rate, all you would have to do is to subtract carrying costs from the spot price. The term “carrying costs” include aspects like interest, foregone interest, and so on. The “spot price” here refers to the on-the-spot price of the crypto asset when the trading parties agree to enter into the forward trade.
Pros of forwarding trading
Hedge protection against volatility
The Crypto market is extremely unregulated and hence immensely volatile. This makes the crypto market highly unpredictable. It’s not that the predictions always fail but in several cases, the crypto market has both shocked and surprised the analysts.
Now, what if your chosen crypto tanks when you had planned to sell it off at a high price based on a predicted rally in the coming months? Well forward trade would protect you from probable losses if the market takes a similar turn on the trade settlement date. In forward trade, the trade is settled on a predetermined “fixed” price. Thus, even if the chosen crypto crashes, despite multiple optimistic predictions, you will be able to sell it off at your pre-determined “preferred” price.
Opportunities for customization
This is one of the best advantages that forward trade holds over spot trade.
In spot trade, you will have to trade based on the on-the-spot rate of your chosen crypto asset. There is no room for customization or speculation. If you want to trade on the spot, you will have to settle the trade immediately based on the present price.
But, you can always customize when it comes to forward trade. You will be able to customize the price as well as the date. There is a lot of free space here to settle the trade on your own terms. However, you need to mention the date and price beforehand, on the very day when you will enter into the trade contract with another party.
No upfront payment
In forward trade, there is no need to make the payment upfront. It’s just that you will have to decide on the price on the date of signing the contract. But, after that, you will get ample time to gather the money to make the payment. Just make sure to settle the payment on the agreed date of settlement of the trade.
Trading platform for forwarding trade
It’s to stress here that forward trade is not executed by crypto exchanges. This is another major difference between forward and spot exchange trade. Crypto exchanges only allow those trades that follow a standardized protocol. But, since forwards follow a flexible protocol, these trading methods are not permitted by crypto exchanges.
Forwards are more of OTC products and hence OTC platforms are the ideal trading portals for them. The OTC platforms are comparatively more flexible than crypto exchanges and hence allow bigger room for customization.
P2P trading platforms
In P2P trading platforms, the trading is executed directly between the two trading parties. In terms of flexibility, the P2P platforms offer the highest rate of flexibility for customization of the terms of the trade. A buyer here would have the privilege to choose the most compatible and credible seller based on the ratings and reviews offered by other buyers.
Now, of course, forward trading comes with counterparty risk as there is no compulsion for upfront payment. But cutting-edge P2P platforms have started deploying smart contracts that make the payments automatic, thereby eliminating counterparty risk by a large extent.
A forward trade is not without risk. It could be a heavy blow for any trader if the chosen crypto rallies up to a much higher price than the quoted price on the day of the trade. Thus, always follow through with technical analysis before deciding on the ultimate trading price. There is no rush; take as much time as you want but make sure to conduct in-depth research before finalizing the price.