Futures Based on Bitcoin: Understanding Them and marketplaces to deal
Unfiltered Bitcoin Futures Guide: The Lowdown on HODLing and Swinging
Bitcoin futures, essentially, are arrangements to buy or sell some digital loot at a later date for a predetermined price. That's how businesses and the industry protect themselves from price swings, but they're also a goldmine for speculators.
You've likely heard this term bandied about if you've kept tabs on digital currency. News of futures deals from the likes of CME, Cboe, and Bakkt have sent ripples throughout the crypto community as investors gear up for potential institutional cash inflows. But what exactly are these futures, and why all the fuss? Moreover, is it possible for an average Joe to join the party? That's why we're here. Let's demystify futures and show you where to trade Bitcoin futures.
- Futures 101
- The Speculating Set
- Leverage Games
- Top Bitcoin Futures Exchanges
- Final Thoughts
- Frequently Asked Questions
Futures 101
A futures contract is a pact between two suitors to buy or sell an asset at a fixed price in the future. Let's break it down with a simple scenario:
Current oil price: $100 per barrel. Trader A thinks oil prices are going to soar in the next three months, whereas Trader B fears a price drop. They strike a deal that in three months, Trader A will buy 500 barrels from Trader B at the agreed price of $100. Regardless of market fluctuations, Trader A can seal the oil purchase at the agreed rate. If A is right, and the oil price increases, A can resell for a profit since they bought at a fixed rate. If A is wrong and prices tank, they'll still shell out for oil at the agreed rate, but they end up stuck with an overpriced asset.
This game map also applies to Trader B, but in reverse. If the price soars, B misses out on a potential profit, but if the price drops, B is shielded against losses.
Enter the Speculators
This is the essence of futures contracts, protecting investors from market uncertainty and sudden surprises. They're widely used in big industries to guarantee asset costs in the coming months. But, get this—the contracts themselves can also be bought and sold, creating a market for high rollers known as speculators. These contracts become more or less valuable depending on the market's change since creation and time until expiration.
Imagine a contract to buy oil with a $100 per barrel fixed price. When the three months wrap up, the transaction occurs. However, if there's only a week left until the deadline, and the market price has spiked to $500 per barrel (we're making a point here), the contract then promises a potential $200,000 profit. 500 barrels at $100 will cost $50,000, but those barrels are now worth $250,000. If Trader A doesn't fancy flipping the barrels, they can sell the contract to someone else as long as it hasn't yet expired, still walking away with a nice tidy sum.
Bitcoin futures operate on the same principle. If you believe Bitcoin prices will climb, you can surely buy it and sell it later if your predictions pan out. But futures contracts offer an alternative strategy for investors to make moolah off Bitcoin price movements without ever owning the digital asset. This can come with benefits. One is that Bitcoin trading is often unregulated or poorly regulated in various markets, but futures trading has far more clarity around the rules lingering in the next five years. Investors have little to fear about planned policy changes in the futures realm compared to the digital currency market, where such certainty is scarce.
The Importance of Leverage
Lastly, an exciting perk of futures is leverage. Leverage is when an exchange allows you to post a fraction of capital for an investment with the exchange footing the rest. You'll thereby enjoy 10x the returns if you make a profitable wager, but also higher risk. If the market moves unfavorably, you can quickly lose your stake (in this case, the initial investment) if you don't actually own the underlying Bitcoin.
To illustrate, suppose you want to purchase $100 worth of Bitcoin, but can only $10. If the exchange offers leverage, they'll float a loan for the $100 transaction. A successful wager would result in 10x the returns, but a downmarket move means a faster loss of capital (actually the $10 stake in this example). If the market craters, the exchange will liquidate your position and take your cash to cover their losses.
Top Bitcoin Futures Exchanges
CME Group
The Chicago Mercantile Exchange (CME), a trusted financial heavyweight, has dipped its toes into Bitcoin futures territory. The platform caters to professional players seeking institutional-grade access to Bitcoin. If you're looking for a reputable platform for Bitcoin contracts, CME could be your ticket.
Bakkt
Bakkt, owned by the Intercontinental Exchange (ICE), the brains behind the New York Stock Exchange, was formed solely to offer Bitcoin futures. It's partnered with industry giants like Microsoft and Starbucks and aspires to lead the digital currency exchange market. Newer than CME but managed by an established trading titan. Bakkt's focus on digital assets might make it a better fit for a crypto-centric platform.
Binance
Binance, a major player in the crypto exchange world, also offers a platform for futures trading. This gives users crypto exchange-like access to contracts instead of institutional platforms—a preference for some. Be warned: Signing up for a futures account with Binance will still involve some bureaucratic hoops, as exchanges typically implement Know-Your-Customer policies.
Benefits of using crypto exchanges for futures trading include a broader array of contract options—not limited to Bitcoin. Exchanges like Binance offer contracts for other significant coins like Ethereum, Litecoin, Ripple, and others. This freedom to dabble in various contracts can open up more intricate trading strategies. Plus, it's possible to engage in futures with less capital than with institutional offerings, aligning with the crypto vision of democratizing financial tools.
However, there's a downside: Exchanges themselves and their futures markets are often unregulated in most places. This brings some uncertainty as to how the coming years will shape future policies. For example, Binance recently ejected U.S. customers and later reopened a U.S.-centric branch, underscoring that rules can change at any moment. While CME and Bakkt are within a well-established legal framework, the same cannot be said for crypto-centric exchanges.
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Conclusion
Now that we've unpacked what Bitcoin futures are and where to find them, it's up to you to decide if these financial vehicles capture your interest. Some may find the benefits don't outweigh the drawbacks, with others preferring to own the underlying asset instead of a contract tied to it. There are certainly those who only wish to touch crypto via futures, arguably driving market growth. Whether you fancy 'em or not, futures based on decentralized assets are likely to remain popular as the digital currency world matures. Even if you bypass trading them, being informed about their role in the crypto world is essential for all enthusiasts.
Frequently Asked Questions
What are Bitcoin futures?
Bitcoin futures are financial instruments allowing investors to speculate on Bitcoin price changes without holding the underlying asset. These contracts fix a future delivery price for Bitcoin. Traders can take long or short positions based on whether they predict Bitcoin prices will increase or decrease.
How do Bitcoin futures work?
Bitcoin futures operate through a contract to buy or sell a set Bitcoin quantity at a predetermined price on a future date. Traders can take either a long (buy) position if they believe Bitcoin prices will rise or a short (sell) position when they fear a price drop. The settlement typically occurs through physical Bitcoin delivery or cash settlement, contingent on the specifics of the exchange and contract format.
What are the advantages of trading Bitcoin futures?
Trading Bitcoin futures offers opportunities to profit from both rising and falling Bitcoin markets. Futures markets boast greater liquidity and potentially lower transaction costs compared to trading in the spot market, leading to more efficient trade execution. However, it's essential to remember that futures trading carries risks, and traders should carefully consider their risk tolerance and market knowledge before engaging in such activities.
- Bitcoin futures are contracts that allow an investor to buy or sell a predetermined amount of Bitcoin at a specific price in the future, protecting them from market uncertainties.
- These contracts can also be traded among speculators as assets, profiting from price changes without owning the Bitcoin.
- Bitcoin futures trading offers the benefits of leveraged investing, allowing traders to bet on their predictions with a fraction of the capital they'd otherwise require.
- CME Group, Bakkt, and Binance are among the top platforms offering Bitcoin futures trading, catering to a wide variety of trader profiles.
- Crypto exchanges like Binance offer contract options beyond just Bitcoin, providing a more extensive range for intricate trading strategies.
- Conversely, trading through unregulated exchanges bears some uncertainty about future policy changes, such as Binance's abrupt changes in its service offerings for U.S. customers.
- When trading Bitcoin futures, remember that losing initial investments is possible if the market moves unfavorably, regardless of owning the underlying asset.
- Users looking to'hodl' Bitcoin might shy away from futures, instead preferring to own the digital asset directly.
- Informed awareness about Bitcoin futures is crucial for crypto enthusiasts, as these financial vehicles are likely to persist in the maturing crypto market.
