Futures are valid agreements to buy and sell an asset or a fixed amount of cryptocurrency at a specific price, on an exact date in the future. A futures contract allows a buyer and a seller to settle a transaction at a particular time in the future, for a specific amount.
In simple terms, once a Bitcoin futures contract has been created, both parties involved are required to go forward with the transaction (to buy or to sell Bitcoin) at the previously agreed-upon price, disregarding the current market price altogether.
Bitcoin futures work on identical principles as futures of traditional financial assets. Bitcoin futures are, in essence, a sort of risk management tools used in financial markets to balance out price fluctuations and the resulting volatility. There are two primary positions on any Bitcoin futures contract, namely the “long” position and the “short” position.
Just like in the case of a margin trading, any of the two parties can opt for either the long or the short position. Often times, the buyer is the one who takes the short position, aiming for a favorable price. The seller takes a long position in the hopes of establishing a higher price per Bitcoin at the contract’s expiration date.
The resulting advantage is the fact that both parties are ensuring protection against the volatility of Bitcoin prices.
With the help of Bitcoin futures, investors can speculate on the price of Bitcoin without having to own Bitcoin. Futures can be traded on financial assets, but they can be traded on regular exchanges as well.
The advantages of Bitcoin futures
The main advantage that stems from this is that investors are allowed to speculate on the price of Bitcoin even in areas where Bitcoin trading is strictly forbidden. Bitcoin futures can be traded on the platform they have been created anytime over the lifetime of the settlement.
For example, a trader only has to put up a small part of the full contract as a margin. This allows anyone to benefit from the price swings of the full contract. Another advantage is represented by the fact that neither party has to immediately agree on the transaction’s completion. Bitcoin futures bring more convenience to the market, ensuring that anyone can buy and sell Bitcoin easier and with fewer risks involved. This makes Bitcoin futures appealing to producers and consumers alike, as well as to traders who want to speculate on the Bitcoin price movements.
More in-depth info about Bitcoin futures
The futures are also leveraged, which means that they offer investors the possibility of controlling a large amount of an asset with a minuscule amount of real cash. When you buy a Bitcoin futures contract, you get the benefit of someone else holding the particular asset for you. This allows you to use your money elsewhere and for other investment purposes.
In theory, Bitcoin futures should help increase the Bitcoin market efficiency and ultimately reduce volatility. The price of futures is usually close to the current price of the underlying asset. Usually, their prices are higher than that of the spot price.
Other important details include the tic size of $25 per contract. This means a $5.00 per Bitcoin. The daily price fluctuation cap is of 20% above or below the previous day’s clearance price.
Trading Bitcoin futures
Unfortunately, the trading of Bitcoin futures is a largely unregulated phenomenon. However, this is bound to change, as more and more brokers are expected to adopt Bitcoin futures in the future.
There are a few cryptocurrency exchanges that offer the option of trading Bitcoin futures, including OKCoin and BitMEX. Investors can also use various publicly regulated exchanges such as The Chicago Mercantile Exchange (CME), one of the most famous exchanges in the traditional fiat economy, and The Chicago Board Options Exchange (CBOE), the largest exchange in the US.
Trading Bitcoin futures on The Chicago Mercantile Exchange portal involves first finding a broker that trades on CME and is willing to trade on your behalf. More often than not, a fee will also be required. You will then open a margin account with your broker.
There are three important elements that determine the price of Bitcoin futures: the expiration code (the specific expiration date), the bid (the buying price), and the ask (the selling price). Any agent operating or interacting with these prices will take on three roles as an individual speculator, a market maker, or an arbitrageur.
The market maker is a firm or an institution that has agreed to take on the role of both the buyer and the seller for a specific security. This means that the company in question promises to keep the bid/ask prices at a relatively close margin.
While not exactly a big hit right now and in spite of their lack of regulation, Bitcoin futures might give investors a needed confidence boost. As mentioned before, Bitcoin futures bring more liquidity to the market, hence, they allow investors to buy and sell Bitcoin in more lucrative ways.
Finally, they open up the Bitcoin market to a broader audience, including countries with very strict policies against altcoins, where the trading of Bitcoins has been banned.
All in all, the launch of Bitcoin futures by CBOE and CME helps with price transparency and further helps solidify Bitcoin’s image as a legit asset class. Currently, Bitcoin futures are best suited to investors with large interests.