Crypto Trading Instruments: Pros and Cons By, Jeff Boccaccio and Bill Scheidt of The Systems Lab Inc

Bill Jeff Side by Side HeadshotFirst of all, why would anyone want to trade crypto right now? Many people don’t want to touch cryptos after the highly public implosion of the FTX exchange and the 60+ % drop in Bitcoin last year. Cryptos are hated at the moment. This in itself is one possible reason to start trading crypto now.

Whatever your reason for trading cryptocurrency, the world of crypto can be enticing, but it can also look complex and confusing. One of the ways this complexity manifests itself is in the number of different crypto instruments that are available to trade. There are so many ways to trade crypto that some traders summarily dismiss the world of crypto because it seems like too much effort to even figure out where to begin. In this article we’re going summarize four of the most popular ways to trade crypto and highlight some of the pros and cons of each.

Crypto ETFs

What Are They?

A cryptocurrency exchange-traded fund (ETF) is a fund that tracks the price of one or several digital coins. These trade on traditional market exchanges rather than crypto exchanges. Crypto ETFs can hold the cryptocurrency directly, hold crypto exchange-traded futures or hold equity positions in crypto-focused companies.


One of the major advantages of crypto ETFs is that they allow traders to participate in crypto without having to go through the trouble of using a cryptocurrency exchange. In addition to being more convenient, crypto ETFs may offer a greater degree of safety than crypto exchanges because traditional market exchanges and brokers may be more secure and stable. Crypto ETFs also provide a degree of protection from mistakes such as lost wallet keys or sending your crypto to the wrong wallet. Finally, traders may be able to trade crypto ETFs with leverage (via both margin-enabled brokerage accounts and by using options), whereas the leverage available to trade the underlying coins may be limited on crypto exchanges in certain jurisdictions.

From our subjective experience, we first began trading cryptos on ETFs because it felt most comfortable to us. We already had years of experience trading other types of ETFs, plus crypto ETFs were readily available at brokerages we were already using. Being human (read as “a bit impatient and also stuck in our ways”), we didn’t want to deal with setting up an account at a crypto exchange when we could just take the easy route and go with crypto ETFs.


One of the downsides of crypto ETFs is that while crypto exchanges trade 24/7, traditional exchanges are limited to customary market hours. The related exposure to overnight gap risk can produce larger-than-1R losses. For example, a long-only back test of the PRX Crypto System, using the crypto ETF that tracks Bitcoin (GBTC) on 30-minute bars, produced an SQN of 3.3, a net of 131 R, and an expectancy of 0.6 R, from February 1st, 2017 to Feb 1st, 2021, before slippage and commissions. While these are excellent results, it should be noted that, because of an adverse gap, the largest losing trade was -2.8 R. This is almost three times larger than the -1 R loss cap that many traders shoot for, and future gap-related losses may be bigger if crypto volatility explodes again.

Another downside is that some crypto ETFs are traded over the counter, which means they require limit orders and can be hard to borrow for shorting purposes (hence the long-only back test example above). For those who prefer longer hold times, some of the downsides to crypto ETFs also include management fees and the fact that ETF prices may not move exactly in step with their underlying digital assets.

Cryptocurrency on Crypto Exchanges

What is It?

Here we’re talking about buying and selling digital currency directly on cryptocurrency exchanges. This can include popular digital tokens such as Bitcoin and Ethereum, as well as a multitude of newer and lesser-known altcoins. The cryptocurrency exchanges on which these coins are traded are businesses that allow customers to buy and sell digital currency for either fiat money or other cryptocurrencies.


Because cryptocurrency and crypto exchanges are independent of central banks, this type of crypto exposure can be used to manage risks associated with the financial system. Another upside is that there are many digital coins available, and these can often be traded in pairs denominated in other digital currency, not fiat currency. Further, many crypto exchanges are offering commission-free trading for the larger cryptocurrencies like Bitcoin and Ethereum, which can significantly reduce execution costs. Also, because of the newness of the markets, many altcoins can make huge percentage jumps in price. Of course, volatility can be a double-edged sword, so trading these requires an excellent system and solid trader psychology.

Another big advantage is that, unlike crypto ETFs, cryptocurrency exchanges trade 24/7. In addition to avoiding the overnight gap risk we mentioned in the section above, this means more opportunity to trade. For example, a long-only back test of the PRX Crypto System on 4-hour bars for Bitcoin (BTCUSD) on the Bitstamp exchange, produced 171 net R over 345 trades from May 4th, 2015 to February 1st, 2023, before slippage and commissions. Using the same system on the Bitcoin ETF (GBTC) only produced 34.9 R over 71 trades. While both systems had the same strong expectancy of 0.5 R, the extra trading opportunity makes a big difference in the number of trades, and thus, the net R.


One of the major drawbacks to this type of crypto trading is exchange-related risk. As we recently witnessed with FTX, even the largest and most popular exchanges can go under, taking investor money with them. We ourselves were caught in the FTX implosion, though fortunately we only lost small accounts that we were using for prototype trading (trading with real money but at small size.) This has made us even more cautious with regard to how we chose exchanges and how much capital we allocate to these accounts. Everyone likes to think this kind of thing only happens to other people. But it’s useful to remember that each of us is someone else’s “other people.”

Additionally, accounts at crypto exchanges can be a hassle to set up, and customer service can be notoriously poor. Commissions and slippage can vary widely from exchange to exchange, and even within the same exchange depending on several factors that are too complex to cover here. Finally, leverage can be limited and taxes on gains can be high, depending on trader jurisdiction.

Exchange-Traded Futures and Options

What is It?

The major cryptocurrencies are available through traditional exchange-traded futures markets via standardized contracts on the CME (Chicago Mercantile Exchange). Bitcoin and Ethereum futures are available in both standard size (ex: 1 contract of Bitcoin futures represents 5 Bitcoin) and their micro equivalents (1/10 of standard), priced in both USD and EUR. Options on the futures contracts are also available, giving traders even more flexibility. The CBOE were actually the first to release a Bitcoin futures contract (by about 1 week) but have since stopped offering them. Also note that Coinbase is now offering a nano-sized contract that represents 1/100 of a BTC or ETH which are available via many FCMs (Futures Commissions Merchants). This means that many existing futures brokers have already made them available.


Like crypto ETFs, exchange-traded crypto futures also allow traders to get crypto exposure without having to deal with a crypto exchange or holding crypto directly (and the associated risks). The standardized contracts trade just like other financially-settled futures on the CME, which may offer familiarity and trust as the CME is the world’s largest financial derivatives exchange. Also, the futures are regulated by the CFTC.

Shorting is readily available, like on other futures contracts, enabling the trader to either hedge or speculate on downside moves. This is one of the few ways to gain short exposure to crypto markets and was a primary driver behind these products. In fact, the original release of BTC futures on the CME on December 17th, 2017 coincided nearly to the day with the initial Bitcoin bubble bursting, when highs of just under $20,000 declined about 85% over the following year before later reaching $60,000.

Like other financial futures (ex: ES, S&P 500 futures) crypto futures trade 23hours/day, five days a week, which offers more trading opportunities and eliminates some gap risk (over crypto ETFs) but does not entirely eliminate gap risk since direct crypto continues to trade over weekends.


As of April 2022, leverage on these crypto instruments is limited to approximately 2x. This is a con in the sense that it is less leverage than crypto perpetual futures (see below). However, this is also an improvement because no leverage was available when these instruments were initially released. Another downside is that position sizing flexibility can be limited for smaller traders because the CME-based contract sizes are still relatively large, even on the micro-sized contracts. The nano-sized Coinbase contracts certainly offer more flexibility on sizing but lack some of the centralized exchange features of traditional futures contracts.

Crypto Perpetual Futures

What is It?

Perpetual crypto futures have similar features to both traditional futures and to trading cryptocurrencies direct. The ‘perpetual’ element means that there are no contract rollovers or deliveries to deal with. From a trading point of view the futures contracts appear similar to the underlying cryptocurrency. Unlike traditional futures, there tends to not be a centralized exchange (like the CME or CBOE), and instead, futures are offered by various cryptocurrency exchanges.


Depending on the given exchange that offers these futures, high amounts of leverage may be available of 10x, 20x and even up to 125x in some cases. While leverage could potentially be a downside in the hands of an inexperienced trader, leverage has personally helped us somewhat mitigate exchange risk. One approach we use is to keep a smaller amount of capital at leverage-enabled crypto exchanges and hold the remaining cash for a given account somewhere safer (like in a bank).

Additionally, like the underlying cryptocurrencies, perpetual futures tend to trade around the clock 24/7, offering more trading opportunities and essentially eliminating gap risk. Also, very granular position sizing is available with fractional contract sizes available on most exchanges. Shorting is readily available, plus there are no contract rollovers to deal with. Finally, there are many different cryptocurrency pairs available, expanding the universe of symbols. All of this means there is a lot of flexibility available when trading crypto perpetual futures.


Crypto perpetual futures are unregulated as these are traded on crypto exchanges. This exposes them to the same exchange-related risks that we highlighted under trading crypto directly. Additionally, they are not available in some jurisdictions like the USA. Also, some exchanges require trading to be done with stablecoins as the underlying ‘quote’ currency, meaning the account balance needs to be held in a stable coin like Tether (USDT) rather than actual USD. This adds both complexity and risk.


The crypto sector is a fast-changing space that offers many different opportunities for a trader to gain exposure to this exciting area. The speed of innovation is great to see and offers a trader lots of choices. There are both simple and familiar ways to take a position (like via ETFs or traditional futures) as well as more complicated but flexible ways (like perpetual crypto futures). Don’t let the availability of choice deter you from taking advantage of the opportunities in this space. There are ways for every trader to get involved.

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