What are Bitcoin Futures?
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Crypto futures is a trading product that trades the future price action for a particular crypto asset. The most widely traded future in crypto is Bitcoin, which isn't surprising since it consumes majority of the crypto market cap. For traders considering to venture on trading BTC minus having to own any directly, Bitcoin futures deliver a feasible, controlled means to do so efficiently. Further, it can help traders hedge against risk against the volatile price variations of BTC.
What are Futures Contracts?
Futures are contracts that stipulate the purchasing or selling of an underlying asset at a prearranged price with a set date in the future. Counterparties are obliged to fill the terms of the futures contract upon expiration by either buying or selling the asset at the market price once the contract expires. Traders can take two positions in a futures contract; either having a long or short position. A long position refers that the trader agrees to buy the asset in the future at the price that was decided, whereas short means the trader agrees to sell the asset at the agreed price upon the contract's expiration date.
Futures contracts are executed on regulated exchanges and used for two purposes:
· Speculating price movement
· Hedging Risk
For the first purpose, a trader can buy a futures contract on a commodity, like copper, if traders predict that the price of copper will increase leading up to the expiration date of the agreement. For example, if copper is at $2 at the time of contract's commencement and the trader assumes the price to increase. For the second purpose, futures contracts can be used to hedge against opposing price movements that would affect a trader that uses the underlying asset in the agreement, in this case, copper. By hedging the trader can confirm better trading outcome at the current price rather than getting a loss from the price movement. Now that we got a sense of an idea of what futures contracts are and how they can be used let's dive into how BTC futures work.
Bitcoin futures are futures contracts that gamble on the price of BTC without traders having to own BTC. Bitcoin futures function the same way as any futures contract on a traditional financial asset. Traders can enter by longing on BTC (predicting the price to increase) or a trader enters by shorting BTC (alleviating potential losses). For example, a trader owns five BTC's at $4,000 and predicts the price of BTC to decrease; they can short a futures contract at the current rate of $4,000. If the price of BTC drops to $3,000 when the contract is nearing its expiration date, then the trader can go long, which mean that the trader protected $5,000 on their position by selling their commitment at a higher price than when they bought at $4,000.
Bitcoin futures offer numerous benefits for traders. First, BTC futures are executed on regulated exchanges, making the procedure much more familiar institutional traders who might not want to execute trades directly with crypto exchanges. Secondly, by exposing BTC to traders, more liquidity can be poured into the market, which makes for healthier trading experience. Lastly, futures trading can help the BTC market be less violate in the long-term and allow traders to protect themselves from unexpected price swings.
In conclusion, BTC is a massive part of the developing crypto market for both retail and intuitional trading. BTC futures will offer traders with transparency, price discovery and risk management capabilities. BTC futures will also provide traders to access the BTC market as well as hedge any direct exposure to BTC pricing.
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