Everyone is asking the question that what are bitcoin futures, should I invest in bitcoin futures? how do bitcoin futures work? what does it mean for the bitcoin price? How does it affect the blockchain technology and cryptocurrencies? and where can you trade bitcoin futures. I will go into answering all of these questions but before I go into that, let’s start from the beginning.
Before understanding Bitcoin Futures it is imperative to understand what are Futures and what do they mean in finance. Understanding ‘Futures’ is understanding half of the ‘Bitcoin Futures’.
What are Futures?
Futures are contracts that puts buyer and seller under the obligation that buyer will buy and seller will sell the committed asset, commodity or financial instrument at a date and price that was decided in advance regardless of what is the actual price.
Futures contracts are negotiated and traded on futures exchanges.
Does dealing in Futures mean making lot of money?
If you have a critical piece of information then you maybe able to use it to your advantage of earning exponential profit but Futures are not always necessarily used for gaining profit; instead, it is used in order to minimize risk and protect individuals and institutions from loss caused by change in prices.
How does a futures contract work
There are two types of positions you can take in futures, Short and Long. Short means to sell and Long means to buy.
If you opt to get into long then you’d need to buy the chosen asset at a specific price upon contract expiry.
If you opt to get into short then you’d need to sell the chosen asset at a set price upon contract expiry.
An easy example is about a real estate developer who uses lot of cement for its projects. Suppose the current price of cement per Kg is $1. If the speculation is that cement prices will increase for next 5 months before getting stable then in this case the real estate developer can buy 5 months futures contract of 10000 kg cement at current price. This contract is worth $10,000.
When the contract expires after 5 months and cement per Kg is $1.5 then the real estate developer have saved $5000.
This contract protected both the seller and the buyer. Cement vendor is protected even if the prices fall because he will still be selling at previous higher price and if the price goes up the real estate developer will still be paying the previous price.
What are Bitcoin Futures?
As you have learned so far that futures can be used for physical commodity as well as financial assets and now it can be done for electronic assets like bitcoins also.
In bitcoin futures, the contract is based around the price of bitcoin and speculators can speculate what the price will be in future.
bitcoin futures can be traded on some regulated exchanges even if the bitcoin is not regulated.
How does bitcoin futures work?
Bitcoin futures follow the same principles of traditional futures.
With bitcoin futures, investor can take two position: long or short.
Imagine you own a bitcoin that is currently worth $20,000 and you think price may go down soon so you sold the bitcoin futures contract at $20,000 Suppose the price goes below $16,000 and the bitcoin futures contract have the same price then you can buy back the contract and earn $4000.
Where to trade bitcoin futures?
Chicago Mercantile Exchange (CME)