Curious about Bitcoin futures? Still confused about Bitcoin Futures?
In this 5-minute article, we explain what you need to know about Bitcoin futures.
Futures Contracts
In general, if you are going to purchase something, the deal is instantly settled by you and the counterparties. For example, if I give you 10 dollars to buy 10 potatoes from you, once we exchange two commodities, the deal is done. This is known as the spot trade.
In contrast with the spot trade, futures contracts involve an agreement where we decide to settle the deal at a specific time and quantity in the future. For example, you and I agree that I will buy 10 potatoes from you for 10 dollars next week. There are two important parts of the futures contract – which are “the price” and the “delivery date”.
Who Might be Interested in Futures Contracts?
Two types of people may use future contracts.
1. Hedge Trader
Imagine you are a farmer who grows potatoes. You might need to sell potatoes futures contract to make sure that you can avoid the price of potatoes declining when you eventually sell your potatoes in the marketplace.
When it comes to bitcoin, the miner is like a farmer. Miners need Bitcoin futures contract to avoid the risk of a volatile BTC price.
In a different way, if you are the owner of a restaurant, you might buy potatoes futures contracts to lock in your raw material cost.
Future contracts are a tool for to hedge against future price changes. If you want hedge against the price going up, you buy futures contracts. If you want to hedge against the price going down, you sell futures contracts.
2. Speculators
Speculators, such as day traders, hedge funds, portfolio managers and other institutions, regard the futures contract market as a high profitability market because of the high leverage offered and the fast price movement. The speculators do not care about nor deliver the underlying asset. Futures are simply regarded as an investment tool.
The pros of futures contracts
Futures contracts usually offer high leverage. Traders only need to invest a small part of the full futures contract as margin to profit from future price changes. Traders can use leverage to own the full futures contract using only a small investment.
In addition, shorting can be done using a futures contract and traders can also profit when the price goes down. Different from normal shorting, traders do not need to borrow the underlying asset at first and pay interest in the future – thus effectively reducing the friction of shorting. By using leverage, traders need to sustain the amount of value of the futures contract in the margin account. Using the Bexplus cryptocurrency futures exchange, the requirement of margin is only 1% – meaning that traders can hold 100% leverage to buy or sell Bitcoin.
Who can buy bitcoin futures contracts?
Almost everyone. In the Bexplus exchange, the Bitcoin futures contract size is 0.1 Bitcoin. I
If we assume that the price of 1 bitcoin was $4000, each contract is $400. With a 1% required margin rate, traders only need to sustain $4 to hold an order of a Bitcoin futures contract. However, traders have to pay attention to the movement of price. If the price goes the opposite way, traders must add to the margin balance to avoid the cutoff. You can trade btc futures on Bexplus.
The relationship between the futures contract price and Bitcoin price
The Futures contract price is usually closely related to the Bitcoin price. Because of Arbitrage, any big difference in the price will be cut down. “Cash and carry” arbitrage happens between the difference in price. If a futures contract is more expensive than the Bitcoin price, traders will buy bitcoin and sell the contract. Because the contract price is higher than the Bitcoin price, traders can buy a futures contract with a settled price using bitcoin and profit from the price difference.
However, if there is an imbalance between the supply and demand of Bitcoin, it could cause a difference between the Bitcoin price and futures contract price, e.g. the expectation of oversupply or shortage of bitcoin in the future. Normally, traders will benefit from buying futures contracts because the seller holds the Bitcoin for you and you can use the money to earn interest at the same time. The potential interest and the cost of storage of the Bitcoin may cause the futures contract price to be slightly higher than the Bitcoin price.
The influence of Futures contracts
Futures may reduce the volatility of the price and increase market efficiency in the long run. However, in the short-term increasing demand for buying and shorting of a futures contract may increase the volatility.
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Before trading cryptocurrency futures contract, we suggest you understand more about it. You can also try it out in the Bexplus trading simulator with 10 BTC preset.
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Important information – please remember that the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. If you are unsure of the suitability of your investment please seek advice. Tax rules can change and the value of any benefits depends on individual circumstances.
