blog posts

What is a Bitcoin futures contract?

What are futures contracts?

A futures contract or bitcoin futures transaction is an agreement to buy or sell an asset at a predetermined price.

After concluding the forthcoming trading contract, both parties must buy and sell at the agreed price on the date of execution of the contract without considering the actual market price on the date. The goal is not necessarily the maximum profit. It is a risk management tool often used in financial markets to avoid the risk of changing the price of regularly bought and sold assets. Bitcoin futures contract are also used in securities to moderate price fluctuations in investments, especially where the main asset is volatile. These contracts are pre-arranged on futures exchanges that act as intermediaries.

How do futures contracts work?

There are two positions in futures that you can participate in: long or short.

If you choose a long position, you agree to buy an asset at a certain price in the future to cancel the contract. When you take a short position, you agree when the contract expires when you sell an asset at a set price. A good way to explain this is to use the example of an airline that wants to avoid raising fuel prices by entering into a futures contract. Suppose jet fuel is traded at $ 2 per module. An airline that expects oil prices to rise is buying a quarterly futures contract for 1,000 units at current prices, so the contract is worth $ 2,000. If the price of each jet fuel is $ 3 per quarter at the end of the contract period, the company has saved $ 1,000. The broker happily enters into a futures contract even when prices are high, and the same contract protects them if fuel prices fall. In this case, both sides protect themselves against fuel price fluctuations. Other investors choose futures contracts instead of using them as a safeguard mechanism, guessing that when the price of a commodity is low, they usually sell longer. As prices rise, the contract becomes more valuable, and the investor can advance. Upon expiration, decide to enter into a contract with another investor at a higher price.

Bitcoin futures contract

What are Bitcoin futures contracts?

The future is not just for physical assets; they can be traded well in financial assets.

With a bitcoin transaction, the contract is based on the price of the BTC, and profiteers can bet on the price they believe the price of the BTC will be in the future. In addition, it enables investors to predict the bitcoin price without having to Pay bitcoins. This method has two main features:

One, while bitcoins themselves are not regulated, bitcoin transactions can be traded in regulated exchanges, which is good news for those concerned about the risk of industry instability.

Second, bitcoin trading in areas where bitcoin trading is prohibited allows investors to guess the price of bitcoin.

How do bitcoin futures contracts work?

The bitcoin futures contract will work under the same principles as the traditional financial assets futures contract.

Also, in anticipation that the price of bitcoin will go up and down, the profiteers will make it longer and shorter for the bitcoin futures contract. For example, if a person owns a bitcoin for $ 18,000 (hypothetical) and predicts that it will fall in price, they can sell it at $ 18,000 to avoid losses. Near the settlement date, the price of Bitcoin has dropped along with the price of the futures contract, now, the investor decides to save the Bitcoin transaction. If the contract trades close to the settlement date and $ 16,000 in the future, the investor earns $ 2,000, so he protects his capital by selling high and buying low. This is a prime example of how bitcoin futures work and the exact terms of each futures contract, which may become more complex depending on the exchange, including the minimum and maximum prices.

What does futures trading mean for the price of bitcoin?

In the short term, it pushes the price up because the general interest is the symbol of cryptocurrency.

The next day, Bitcoin futures traded on the Chicago Board of Exchange Options (CBOE), for the first time in a regulated currency, with prices almost rising to $ 16,936.

Futures trades for bitcoin prices

Similarly, at the beginning of bitcoin futures trading in one of the world’s largest exchanges, CME, the price of bitcoin broke the $ 20,000 barrier.

It is difficult to predict the long-term impact of the price, but the price of bitcoin will continue to rise.

Bitcoin price futures

Does this mean that prices are likely to rise?

There are several reasons for this:

Bitcoin futures can be regulated in public transactions, which gives people who were previously skeptical about non-regulation investing. Organizational investors are likely to offer the future of Bitcoin as a viable investment option for their clients. This is very profitable, as it provides more liquidity to the market and makes it easier to buy, sell and trade cryptocurrencies. This makes the bitcoin market a wider investment, including in countries where bitcoin trading is banned. Because futures are designed and constructed to offset fluctuations in the underlying asset price, it can destabilize the price of bitcoin.

What do they mean by China’s blockchain industry?

There are several possible outcomes:

First, BTC is considered a kind of flagship cryptocurrency for other cryptocurrencies. The more they pay attention, the more people know about the cryptography industry, the higher the uptake of keys, and the higher the prices. Anything is possible, investors may want to sell their alloys or keys to bitcoin for their uptrend, and a large-scale exit could cause the price of alternative cryptocurrencies to plummet.

A more likely scenario is that after investors’ interest is strong enough, some strong currency pairs such as Ethereum, Ripple, Litecoin, etc., will follow in Bitcoin’s footsteps and be used for futures trading.

Where can you make bitcoin futures contracts?

There are two different markets for bitcoin trading.

The first option is in selected currency trades, including Bitmex and Okcoin. Cryptocurrencies have been offering this option for some time, and the BTC futures trade remains largely out of control. The second option is in publicly regulated stock exchanges. This is a new phenomenon and part of the rise in bitcoin prices in December. It started with CBOE BTC futures trading on December 10th. The Chicago Mercantile Exchange (CME) is set to launch in December. Seventeen projects started trading on December 18. Brokerage companies such as TD Ameritrade and JP Morgan also expressed interest in allowing access to these markets