Ripple Futures Trading Guide
We don’t need to be introducing the wildly popular crypto - XRP - to the reader here. But XRP Futures are worth your attention. A Ripple (XRP) future is a derivative contract that derives its value from XRP. It is an agreement between the buyer and seller to exchange or transact XRP at a predetermined price and date - a mandate for both parties to execute or exercise the contract on or before the predetermined future date. Here, the trader does not actually buy or sell the underlying XRP. They only buy or sell the right to make such a transaction involving XRP. A futures contract with no expiration date is called a perpetual future contract.
Ripple futures enable traders to take both long and short positions on XRP. Long, in plain terms, is the practice of buying an asset first and then selling it later to another person or trader. In contrast, short is the practice of selling an asset first and then buying it later to close the position. Though a trader can not take short positions in the spot market, the futures contract allows the traders to go short on XRP when the market falls.
Ripple is a technology that acts both as a blockchain-based digital payment network called RippleNet, with its own cryptocurrency called the XRP. It was first released in 2012, and its main process is to act as a payment settlement system, similar to SWIFT for international money transfers. XRP is the native digital asset on the XRP Ledger—an open-source, permissionless, decentralized, public blockchain led by a global developer community. This technology can settle transactions in 3-5 seconds. XRP can also be sent directly to the receiver without any central intermediary, making it a convenient instrument in bridging two different currencies efficiently. XRP does not run with a Proof-of-Work (PoW) system like Bitcoin or a Proof-of-Stake (PoS) system like Ethereum. Instead, XRP uses a consensus mechanism, via a group of bank-owned servers, to confirm transactions. XRP can consistently handle 1500 transactions per second, 24x7.
The main goal of Ripple is to allow people to break free from financial institutions like banks that enforce huge transaction charges and slower transaction speed. As of August 2021, XRP is the sixth-largest cryptocurrency as per market capitalization, and the maximum supply of XRP is limited to 100 billion. In simple terms, Ripple is the company that facilitates digital payments with their technology, called the RippleNet, whereas XRP is an independent currency powering the Ripple network.
How does the XRP ledger work?
Instead of using the regular blockchain mining concept, XRP uses a unique distributed consensus mechanism to validate transactions. Independent validator nodes come to an agreement on the order and validity of XRP transactions. This agreement, called consensus, serves as a final and irreversible settlement. Validation is the second stage of the overall consensus process, which verifies that the servers got the same results and declares a ledger version final. In rare cases, the first stage of consensus can fail; validation provides a confirmation afterward so that servers can recognize this and act accordingly. The ledger reaches consensus on all outstanding transactions every 3-5 seconds, at which point a new ledger is issued. Anyone can be a validator, and active validators on the ledger today include universities, exchanges, and financial institutions. There are currently 36 validators, and Ripple runs 6 of them—16%.
The key benefits of XRP Ledger include
- Public and decentralized structure: Open source, open to anyone to build on, maintained by the community.
- Streamlined development: Tools and documentation that speed development and reduce time to market.
- High performance: Capable of settling thousands of transactions in seconds.
- Low cost: At fractions of a penny per transaction, costs are inexpensive enough to enable a wide variety of use cases.
- Vibrant community: Developers, validators, users, and businesses make the XRP Ledger better every day.
- Proven Reliability: 8+ years of consistent performance over more than 63 million ledgers.
New Features like Smart Contracts, Non-Fungible Tokens, and Sidechains are under development in XRPL.
RippleNet is a global network of banks and payment providers, that facilitates efficient transfer of money between the sender and receiver. RippleNet utilizes a single and decentralized infrastructure across the entire network, eliminating the need for custom integration work, thereby providing faster transactions.
- The sender requests a quote from the receiver on pricing.
- The receiver responds with a quote on pricing.
- The sender accepts the quote, and provides the receiver with the relevant compliance information.
- The receiver completes compliance checks and locks the payment for the sender.
- The sender initiates the payment.
- Ripple’s technology confirms both parties are abiding by the agreed-upon terms.
- Funds are instantly debited and credited to the sub-ledgers of the sender and receiver.
- The receiver forwards the payment over domestic rails if necessary.
- The receiver notifies the sender that the payment has been delivered.
- The sender and receiver confirm that the transaction is complete.
Base currency vs Quote currency
Cryptocurrency trading pairs simply compare the value of one currency against the other, i.e., the base currency versus the quote currency. It shows how much of the quote currency is required to purchase one base currency. For example, if XRP/USDT=1.1077, then the value of one XRP is equal to 1.1077 USDT.
Delta, one of the variables that determine the future contact premium, is a ratio that calculates the change in premium of the futures contract in response to the change in the underlying price. The delta for a futures contract is one, i.e., for every single point move in the base currency price, the futures premium moves one point.
What is an Inverse Contract?
A contract that is quoted in one currency, but always settled in the underlying or base currency is called an inverse contract. A trader needs to confirm the traded quantity in the quoted currency (USDT) and then use their base currency (XRP) to calculate margin, profit, and loss. If a trader wants to trade an XRP/USDT contract, he simply uses XRP as his base currency.
What is a Linear Contract?
A linear pay-out is the simplest to describe and is used for many altcoin futures. Unlike inverse contrast, a linear contract is both quoted and settled in the same currency.
In traditional markets, most instruments are actually linear contracts, which means the exposure is constant. If a trader owns one linear contract on XRP/USDT, he will have a delta of 1. The PNL for this position is realized in USDT: 1 x (Exit Price – Entry Price). In an inverse contract, it is still quoted with a XRP/USDT price, but the contract quantity is now in USDT instead of XRP. In an inverse contract, a trader gets a constant USDT delta, but a variable XRP delta. This means, being “inverse” is riskier than being “short” in futures contract.
XRP futures can also be used to hedge a spot position. If an investor wants to protect his holding when the price of XRP falls, the investor can short XRP futures to protect the downside risk of his XRP position. Using the XRP futures judiciously can help the investors protect their position by locking the value of XRP even during times of market fall.
Using borrowed capital (debt) as a funding source to invest and amplify returns on the capital risked is called leverage. For opening a position of a given size, the higher the leverage, the lower the trading capital required. Trading exchanges like C-Trade provide leverage up to 100X, allowing traders to open an XRP future contract worth a hundred time the capital available. Leverage acts as a multiplier of returns if used right.
Let us suppose XRP is trading at 1 USDT per token. An XRP futures trader is bullish and decides to open a long XRP futures position at that price by buying 10,000 XRP futures contracts at 10x leverage.
With each contract having a contract size of 1 XRP, the initial margin required to open this position is: 10,000 x $1 / 10 = $1,000. However, do note that if the price of XRP falls more than 10%, the trader will stand to lose his entire $1,000 investment as the position gets liquidated. Depending on how the price of XRP performs, the trader can either make a lot of money or lose his entire investment.
A futures contract is a double-edged sword, that with proper understanding and learning if wielded right, can vastly increase profitability. Also, it can be used to hedge the open positions in an investor’s portfolio. To get started on Ripple (XRP) futures, head over to the C-Trade Exchange.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. C-Trade, its affiliates, agents, directors, officers, or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same