Bitcoin is a type of digital cash, sometimes known as a cryptocurrency, produced or mined online by users solving challenging arithmetic challenges. These bitcoins are afterward stored in a digital wallet on the user’s computer or in the cloud.
The price of virtual currencies, like Bitcoin, is highly volatile. As a result, the value of your virtual currency futures contract and the possible profit and losses associated with it will be affected by fluctuations in the underlying virtual currency’s value between the time you initiate a transaction and the time you seek to liquidate it.
Therefore, investors must exercise extreme caution and keep a close eye on their investments. Let’s have a look at what are bitcoin futures.
Bitcoin: A Quick Introduction
Bitcoin futures are a sort of derivative trading instrument. Two parties admit to trading bitcoin at a predetermined price at a future date, usually on a commodities market. Any trading agreement that tracks the price of an underlying asset is referred to as a derivative.
In essence, you commit to purchase or sell Bitcoin at a given price on a specific date, regardless of market conditions. The contract settlement date is the agreed-upon date by which both parties must satisfy their commitments.
When a bitcoin futures contract ends, whoever commits to acquiring bitcoin must do so at a premium or a discount (since it’s extremely doubtful that bitcoin would be the exact price when the contract ends as it was when it was negotiated). The amount that an individual must pay is defined by the current market price (frequently known as the spot price) and the price of each futures contract in their ownership.
Important Points to Consider
- It’s worth noting that each contract has two sides. If one individual makes a profit, there is an investor who loses money on the opposite side.
- Futures contracts always have an expiration date. Investors have the option of selling their contracts to another party before they expire or waiting until they expire to settle them.
- The pricing of bitcoin futures and the market price of bitcoin tend to fluctuate based on the current settlement of futures traders. The contract’s value will usually be higher than Bitcoin’s current market price if more people are betting on its growth. The scenario is reversed when more traders expect that the price of bitcoin will fall in the future. The bitcoin futures contracts’ prices and bitcoin on spot markets tend to converge as contract expiry dates approach.
Bitcoin Futures are Explained in Simple Language
Let’s use the following example as an example:
- Assume you wish to speculate on gold’s price. You may go out and buy gold bars in person and then sell them when the price rises.
- However, because you’d have to factor in storage and transit costs, this is virtually unfeasible and expensive. Instead, a better strategy would be to trade an instrument or contract linked to gold’s price.
- These are agreements that assist you in signing with an opposing party. It also helps you think that you feel the price will rise while someone else believes it will fall.
- You and another speculator can sign an agreement stating that if the price moves in either direction after a specified time, one side must pay the other the price difference.
- For example, suppose the price of BTC is $1000, and you expect it to climb. It’ll go down, your counterparty predicts. However, by the time you need to settle the contract, the price has risen to $11,00. The opposing trader will pay only the difference of $1,00.
- Assume the situation is reversed, and the price drops to $900; you will be required to pay $1,00. As you can see, an investor or trader can earn even when prices fall without needing to hold the underlying asset in such an agreement or contract.
- Though this is how derivatives function in the trading world, there are numerous variances in reality. Futures settlement options and perpetual contracts are the most extensively used derivatives in the bitcoin sector.
Advantages of Trading Bitcoin Futures
Flexibility
Bitcoin Futures give non-Bitcoin holders the ability to speculate on the price of Bitcoin and earn quickly. For example, you may use USDT to open a position in a Bitcoin futures contract, and any winnings will be paid out in USDT.
Leverage
Bitcoin futures contracts allow you to have a lot of exposure to Bitcoin for a fraction of the price. As a result, you may use leverage to magnify relatively tiny price fluctuations and turn them into profits worth your time and efforts.
Liquidity
With billions of dollars in monthly turnover, bitcoin futures are one of the most liquid markets in the crypto economy. Because there is always someone eager to take the opposing side of a particular position, a liquid market is often linked with lower risk, and traders will experience less slippage.
Portfolio Diversification
Bitcoin futures provide you with additional ways to diversify your trading tactics and increase your earnings. Short-selling, arbitrage, pairs trading, and other complex trading tactics are now available to traders.
Final Thoughts
Bitcoin accounts for a sizable piece of the rapidly expanding digital asset industry. Bitcoin futures offer investors transparency, price discovery, and risk management skills. In addition, individual market players will be able to access the Bitcoin market and hedge any direct exposure to Bitcoin prices through the contract. From https://wazirx.com
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