What are Bitcoin Futures?
Story by: Emily Perryman
Futures have been around in the investment world for hundreds of years, but they only entered the cryptocurrency sphere at the end of 2017. Since then, a whole host of exchanges have expressed interest in launching Bitcoin futures trading, offering people new ways to invest in crypto.
But what exactly are Bitcoin Futures? To understand how they work, it helps to take a step back and explore their use in the wider investment field.
What are Futures?
Futures are an agreement between two parties to buy or sell a commodity or financial instrument on a precise future date at a specified price. When the contract expires, both parties to the contract must buy and sell at the agreed price – even if the price of the underlying asset has fallen or risen over time.
Futures are used to try to make a profit when people speculate on the price movement of the underlying asset. They are also used to hedge against the risk of price fluctuations, which is especially useful when the underlying asset’s price is very volatile.
Futures contracts are negotiated and traded on a futures exchange.
Long and short positions
In a futures contract one of the parties holds a long position and the other holds a short position.
If you take a long position, you agree to buy the underlying asset in the future at a specific price when the contract expires. If you take a short position, you agree to sell the asset at a set price upon the contract’s expiration.
Let’s imagine a farmer and a bread maker enter into a contract for the delivery of 1,000 bushels of wheat at £4 per bushel. The farmer holds the short position because they have agreed to sell their wheat. The bread maker holds the long position because they have agreed to buy the wheat.
What are Bitcoin futures?
Futures don’t always involve commodities but can be based on financial instruments, for example stock market index futures. Since December 2017, it’s also possible to trade Bitcoin Futures.
Bitcoin Futures enable you to speculate on what you think the price of Bitcoin will be in the future – without you actually owning any Bitcoin. They work in exactly the same way as futures on traditional investment assets.
You can take a long position if you expect the price of Bitcoin to rise; or if you own Bitcoin, take a short position to mitigate the impact of potential losses.
Each futures contract contains a specified amount of the traded product. CBOE Bitcoin Futures, for example, each contain one Bitcoin and are based on the Gemini crypto exchange’s auction price for Bitcoin, denominated in US dollars.
A key benefit of Bitcoin Futures is they can be traded on certain regulated exchanges. This could make trading Bitcoin more attractive to people who are nervous about dealing with cryptocurrency exchanges directly.
Another advantage is you can speculate on the price of Bitcoin without having to store Bitcoins.
Where can I trade Bitcoin Futures?
Bitcoin Futures were first introduced by the CBOE Futures Exchange in December 2017. This was closely followed by the launch of Bitcoin Futures by the CME Group. CBOE and CME are still the main regulated exchanges where you can trade Bitcoin Futures, but it is expected more institutions will come on board. Nasdaq is thought to be testing Bitcoin futures trading, while brokerage firms TD Ameritrade and JP Morgan are also said to have expressed an interest.
There are some cryptocurrency exchanges that enable you to trade Bitcoin futures, such as Hong Kong-based OKEx, and BitMEX – one of the largest cryptocurrency exchanges.
Understanding the risks
Before you begin trading, it’s extremely important that you understand the ins and outs of futures contracts. For every futures trade there is a winner and a loser, so there’s a real risk you could end up with less money than you started with. Having said that, if you’re an experienced trader and are able to take on risk, Bitcoin futures could add a new twist to your crypto investment journey.
Original story: https://finance.yahoo.com/news/bitcoin-futures-120024166.html
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