Bitcoin (BTC) has emerged from the days of humble beginnings to become a mania to reckon with in the global financial industry. By extension, this means that cryptocurrency traders and investors can do more than buy and sell cryptocurrencies. Cryptocurrency derivatives are now in the picture in the form of Bitcoin futures.
Meaning of Derivatives
You may ask, what does cryptocurrency derivatives mean? A derivative is a betting instrument used between two parties for the development of the real, but not immediately obvious asset. These betting instruments come from the real asset which has no value of their own.
Derivatives are useful in speculating what the price of a cryptocurrency will be in the future and in hedging. Now, the name of one of the well-known types of derivatives used for insurance against losses is futures.
What are Bitcoin Futures?
A Bitcoin future is a financial agreement between two parties in which one party agrees to buy or sell an asset at a future date and at a particular price. Futures have been around since the late 19th century and companies and investors use them extensively.
In a nutshell, Bitcoin futures have the capacity to bring down the price of Bitcoin. Trading on futures enables new investors to bet against Bitcoin and give them the leverage to settle projects in U.S. dollars, thereby increasing liquidity.
Also, Bitcoin futures enable investors to balance the cryptocurrency without really owning it. The icing on the cake is that it protects investors from any volatility in the market. This is so because volatility could reduce the demand for Bitcoin.
Hedgers and Speculators in the Futures Market
Futures markets involve both hedgers and speculators with their unique roles. Hedgers are mainly concerned with protecting themselves from price losses in the future. So, they will buy or sell their commodity to stabilize price against future price drops.
On the other hand, speculators bear the risk by borrowing enough money to buy contracts that they hope will increase in price, in the future. But, if the market goes otherwise, they are bound to lose more than they have invested.
Bitcoin Futures Contract
Futures contract trading started a couple centuries ago, although cryptocurrency futures are still new to the market. A Bitcoin futures contract is a contract that helps you to buy Bitcoin at an agreed price and at a specified time in the future.
As a prerequisite, futures contracts must be traded on standardized exchanges such as the Chicago Board Options Exchange (CBOE) or Chicago Mercantile Exchange (CME). Consequently, the trading of Bitcoin futures in an established and regulated derivative exchange will propel more investors to trade on cryptocurrencies.
As a result, this will give Bitcoin a prime place in the global financial market. It will also increase the price of Bitcoin as crypto investors can protect their positions based on the future market. Bitcoin miners will reap the benefits of futures contracts because they can use them to protect against their mining cost. They will also collect money in advance from speculators hoping to make a profit in the future.
Example 1: If the price of Bitcoin is $5,000 USD per BTC as of today and your expectations are that it will rise to $7,000 USD per BTC in a month’s time, then the entering contract which permits you to purchase Bitcoin at $6,000 USD in a month’s time is quite attractive.
Therefore, Bitcoin futures are coming up top in the emerging cryptocurrency derivatives market.
Bitcoin Futures at the Moment
Bitcoin futures are already changing the game for cryptocurrencies. It is opening the door to broad participation in the market by retail investors. Interestingly, Bitcoin futures have really been accepted by the crypto community. The trading of Bitcoin futures was not regulated in the first instance. However, it has even been used as a means to prevent the heavy regulation in the financial ecosystem.
How to Trade Bitcoin Futures
There are two positions or strategies involved in the trading of Bitcoin futures and other derivatives. They are long and short positions.
If you take a long strategy, then you agree to purchase an asset at a particular price in the future when the price has expired. On the other hand, when you take a short strategy, then you agree to sell an asset at a pre-determined price when the contract has expired. The following example will explain it better.
Example 2: If the price of Bitcoin at the moment is $6,000 USD, and you expect it to increase to $9,000 USD in the next 6 months from now, then you will pay good money that will permit you to buy Bitcoin for $6,000 USD in 6 months, when other people are buying it at the rate of $9,000 USD.
On the other hand, if the price of Bitcoin at the moment is $7,000 USD, and you expect it to drop to $4,000 USD in the next 6 months from now, then you will pay a good sum of money to enable you to sell Bitcoin for $7,000 USD in 5 months.
Where to Trade on Bitcoin Futures
Many exchanges are now trading on cryptocurrency derivatives – Bitcoin futures, as a standard quality. Some of the exchanges include BitMEX (the present market leader), Crypto Facilities, Deribit, OKCoin, Coinpit. Also, included is Ledger X, which is the first regulated cryptocurrency exchange in America.
The easiest way to trade Bitcoin derivatives, as well as other cryptocurrencies, is through contract-for-difference contracts. The core utility of Bitcoin futures is to secure the delivery of any product at the agreed time and date.
Cryptocurrency investors can trade on futures contracts with the help of their brokers when trading Bitcoin futures on Chicago Mercantile Exchange (CME). So, you need to find a broker who trades on CME. Then, you open a margin account with the broker instead of a cash account, as margins are involved in options trading.
The trading of Bitcoin futures started with its launch at Chicago Board Options Exchange (CBOE) on the 10th of December, last year. Some brokerage firms have indicated interest to access these markets.
The CME group introduced Bitcoin futures last December while CBOE followed with their own launch of a similar product. These developments will support the price of Bitcoin and open the doors for more conventional investment into cryptocurrencies. It is likely to pave the wave for an exchange-traded money which could attract more investments into the cryptosphere. Lastly, Bitcoin futures reduce Bitcoin’s high level of volatility in the long run.
This article should not be taken as is, and is not intended to provide investment advice. Users are ultimately responsible for the investment decisions he/she makes based on this information. It is your responsibility to review, analyze, and verify any content/information before relying on it. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct a thorough research before investing in, or creating any cryptocurrency, and read our full disclaimer.
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