What Are Bitcoin Futures Contracts And How Do They Work?


Briefly

  • A futures contract is a regulation that requires a broker to buy or promote an asset at a selected time, amount and price.
  • Bitcoin futures help bring additional liquidity to the market and also present alternatives for arbitrage.
  • Since the value of buying and selling Bitcoin varies, the value of various Bitcoin futures contracts will also vary.

Bitcoin is the largest cryptocurrency by market capitalization. Like other cryptocurrencies, it is also extremely risky. In March 2020, for example, The price of Bitcoin virtually halved in just days as markets collapsed amid concern over the pandemic. By early September, it had rebounded from around $ 4,000 to highs of $ 12,000– before quickly crashing once more, plunging below $ 10,000.

Cash buying and selling – the sequel to buying and promoting Bitcoin – forces traders to trade cryptocurrencies at their gift fresh. However, what if there was a method to lock in that $ 4,000 price tag, choosing Bitcoin a few months later? So even when the price of Bitcoin reaches $ 12,000, the counterparty must ship the purchase of Bitcoin with $ 4,000.

There can be! This is called a futures contract. A futures contract is a settlement between two traders that requires a trader to buy or promote an asset at a selected time, amount and price. For example, you can make a settlement in mid-March to buy Bitcoin for $ 4,000 for August 30. You are also on the opposite side of the deal, agreeing to promote Bitcoin at a firm and fast price. If you are a buyer, you need the buying and selling price of Bitcoin to increase because you can buy the cryptocurrency below market value while sellers need the alternative, profiting if Bitcoin has been lower in price.

Individuals have gone crazy for Bitcoin futures like big players like CME Group and TD Ameritrade entered the house. When Bitcoin futures debuted on the Chicago Board Choices Trade (CBOE) in December 2017, the CBOE website was overwhelmed. On Bakkt, the Bitcoin futures platform operated by Intercontinental Trade, around 11,000 futures contracts are traded every day.

Previously 24 Hours (as of September 10), $ 2.03 billion of futures contracts were traded on Binance; $ 2.01 on Huobi; $ 1.85 on OKEx; and $ 1.05 on BitMEX.

Futures contracts and the evolution of asset lessons

“BTC futures are a great way to bring additional liquidity to the market and also provide excellent arbitrage opportunities,” Nick Cowan, CEO of the GSX Group, informed Decrypt. “Futures contracts are an important part of the evolution of asset classes because they provide a benchmark – a fair value, or FV – of what future value is, allowing arbitrage and liquidity to be achieved. ‘enter the market. ”

Do you know?

Futures contracts entered into with 17th century Japanese samurai, who were paid in rice but were absent for much of the 12 months to go, no matter what 17th century samurai do. However, they had to make sure that the rice they had been paid for, say in February, held its value until August, in order to negotiate contracts requiring the signatory to pay the same amount of rice in August, regardless. its current value. .

The explanation why you can trade Bitcoin futures rather than just, say, buying a lot of Bitcoin worth $ 4,000 at the time, is that you just don’t have to carry them around yourself. even. (Our analogy with the Japanese samurai is useful here – the Japanese samurai negotiated futures contracts so that they did not have to sell the rice themselves).

Some crypto exchanges, comparable to OKEx, have reduced buying and selling fees for futures contracts, which means that traders can withdraw a little more from their accounts through the use of futures contracts.

How a dealer leaves his place in the long term

Nick Cowan, CEO of the GSX Group, informed Decrypt: “BTC futures are a great way to bring additional liquidity to the market and also provide excellent arbitrage opportunities.” This is because futures contracts are generally not held until their expiration date. Instead, they are traded as different goods. Since the value of buying and selling Bitcoin varies, the value of various Bitcoin futures contracts will also vary.

When entering into a futures contract, there are 3 ways for a dealer to leave his place: netting, rollovers and expiration. Netting is the most common and occurs when a dealer creates another futures contract with equal value and size, rendering their effective obligations void as they stabilize. The roll ends with the compensation of a place, but with an expiration date that is added in the longer term. Expiration is what you expect: it’s when a contract hits its end date and the events that hold the contract buy or promote at the agreed price.

Futures contracts and hedging

Another methodology of buying and selling futures contracts is hedging. Hedging is a method of reducing danger, which is useful for traders facing volatility in cryptocurrencies.

Consider a reseller who simply bought three Bitcoins at $ 10,000 a coin:

  • She believes the price of Bitcoin will rise by the start of the month, but wants to keep its place if it drops.
  • 📅 To keep her place, she will enter into a futures contract to sell Bitcoin for $ 10,000 at the end of the month.
  • At the end of the month, if Bitcoin has gone up, it will make an income by promoting the two remaining Bitcoins.
  • 📉 If it drops, she will lose money, but this will be limited because she will nonetheless sell a Bitcoin for $ 10,000.

The coverage reduces a dealer’s general danger, although it further limits their potential income.

Bitcoin Futures: A Warning Notice

The world of Bitcoin futures is not all fun and video games. The resumption of a contract is a severe obligation, and if it reaches its expiration date, the concessionaire has an authorized obligation to fulfill it.

Futures contracts can cost you a lot of money, as you might be forced to buy Bitcoin above its current buy and sell price. Cryptocurrencies are one of the crucial lessons of risky assets; As with all cryptocurrencies, buying and selling Bitcoin could be very dangerous.

Warning

The views and opinions expressed by the creator are for informational purposes only and do not represent a monetary, funding or different recommendation.

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