How do Bitcoin Futures Work?
How do Bitcoin futures work? Well you are about to find out.
Even though the concept of futures has been around for quite some time, the idea is relatively new in the crypto space. Market participants can now trade Bitcoin futures contracts. These futures contracts were launched in December 2017 and have gained a lot of traction since then.1 They give investors exposure the same way they would to a commodity without the need to hold the underlying cryptocurrency. As such, Bitcoin futures contracts also offer risk mitigation and hedging possibilities. If you’re interested in learning more about these contracts, keep reading.
This article looks at how Bitcoin futures contracts are priced.
How do crypto futures work?
Futures are financial instruments that allow investors to buy or sell an asset like Bitcoin on a future date for a predetermined price. When the time comes, , regardless of the current market price. The main aim here is for investors to reduce market risk as much as they possibly can. A futures exchange or smart contract facilitates the transaction.
- Long position: Buying an asset when the contract expires.
- Short position: Selling an asset when a contract expires.
Now let’s take an example to understand how this works.
Suppose Alice initiates $1,000 worth of long Bitcoin futures contract with Exchange X with a time period of 3 months. This is beneficial for both parties because:
- , Alice can save up on $1,000 while still getting the number of bitcoins she initially wanted.
In either case, both Alice and X are protected from the volatility of Bitcoin’s market with both the long position and the short position.
Another interesting way that investors can leverage a futures contract is via calculated speculation. For example, if the price of Bitcoin drops to $5,000 tomorrow, there is every chance that it may go up to $10,000 again in four months. In this case, the investors may hedge their bets with a futures contract.
How do CME Bitcoin futures work?
Bitcoin futures were launched by the Chicago Board of Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) on December 18th, 2017. There are two significant advantages in CME futures trading:
- The contracts traded here are overseen by the Commodity Futures Trading Commission or CFTC. Large and credible financial institutes like these tend to give users more confidence in their investments.
- . This means that you don’t need to own a Bitcoin wallet to participate, and it will always have high liquidity.
Contract details offered by CME
- 5 BTC contract unit as per the CME CF Bitcoin Reference Rate.
- Price quotation only in USD.
- Trading hours between 6 pm – 5 pm between Sunday and Friday
- Contracts are listed for six straight months and two additional Decembers.
- Contracts are financially settled.
How will Bitcoin futures affect price?
, it triggers renewed interest in cryptocurrency. This renewed interest often accompanies a spike in the asset’s price.
- Bitcoin jumped by 10% to $16,936 just a day after futures trading was launched on CBOE.
- Bitcoin broke through all-time high levels of $20,000 during the run-up to the launch of Bitcoin futures on CME.
There are factors also influencing in this price spike outside of renewed investor interest:
- Because of the high liquidity, it becomes considerably simpler to buy and sell Bitcoin.
- Bitcoin futures trading options are made available to investors in countries where the asset has been banned (since no Bitcoin is actually being transferred).
- Futures contracts allow investors to offset the risks of volatility.
Where are Bitcoin futures traded?
- Chicago Board Options Exchange (CBOE)
- The Chicago Mercantile Exchange (CME)
- BitMEX Exchange
- Kraken Exchange
- Binance Exchange
- BitFlyer Exchange
Trade Bitcoin Futures: Conclusion
Bitcoin futures is an exciting way to benefit from the cryptocurrency market. The best part about futures trading is that you don’t need to be technologically adept to make these trades. There is no need for you to download wallets and handling scary-looking public addresses and private keys to reap the benefits of your trades. On the other hand, If you are already a seasoned Bitcoin trader, . . As such, . If you are ready, then you can start trading in any of the cryptocurrency exchanges mentioned in the previous section.