By Michael Scott
Crypto futures are a form of derivatives contract that allows investors to bet on a crypto asset’s future price. Investors utilize futures contracts to leverage the high unpredictability of most cryptocurrencies. This article uses Bitcoin as an example that shows how they function.
Crypto Futures Explained
Spot trading entails purchasing and selling Bitcoin. It compels traders to exchange crypto at their present prices. One can question whether there was a means to lock in Bitcoins at a present cost of, for instance, $62,000, and the Bitcoin picked up some months afterward. If the price of Bitcoin hits $95,000, the counterparty would be needed to deliver the Bitcoin purchase with $62000.
A futures contract is an agreement between two traders that mandates a trader to purchase or sell an asset at a particular quantity, time, and cost. For instance, in mid-May, a person may enter an agreement to buy a Bitcoin for $62,000 on August 30.
The individual might be on the other side of the deal, accepting the sale of Bitcoin for a specified price. A purchaser might prefer an increase in Bitcoin’s trading price since it will enable them to purchase the crypto below the market value. If one is a seller, they would prefer the opposite, gaining in case Bitcoin’s price is reduced.
Futures Contracts and Asset Classes Evolution
According to Nick Cowan, GSX Group’s chief executive officer, futures are critical to the asset class’s evolution. They offer fair value (FV), a benchmark of future value, permitting liquidity and arbitrating to penetrate the market.
Futures contracts emerged with 17th-century Japanese samurai. They were paid in rice and out most of the year doing what 17th-century samurai do. However, they sought to ensure that the rice they were paid in, for instance, February, maintained its value up to August. This enabled them to trade contracts that mandated the signee to pay the equal rice amount in August, irrespective of its present value.
A significant reason for trading Bitcoin futures instead of, for example, purchasing a lot of Bitcoin amounting to $62000 at the time is that an individual does not have to hold them themselves. In this case, the Japanese samurai equivalence is effective- the samurai traded futures contracts to prevent them from storing the rice themselves.
Some cryptocurrencies have lesser trading fees for futures contracts. This indicates that traders can utilize futures to squeeze more out of their accounts.
End Thoughts
The Bitcoin futures world is not horseplay. Taking on a contract is a responsibility; if its expiration date is reached, the trader must fulfill it.
Futures may result in significant losses since a person may be compelled to purchase Bitcoin way above its present trading price. Cryptos are an extremely unpredictable class; similar to all cryptos, trading Bitcoin is quite risky.