THINGS YOU NEED TO KNOW ABOUT BITCOIN FUTURES

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Futures refer to a contract to buy or sell an asset on predetermined data at a predetermined price. But futures are not only for physical assets. You can also trade them on financial assets, too. With bitcoin futures, the contract will center on the price of bitcoin and the speculators can place bets on the future price of bitcoin.

Investors can speculate without actually owning bitcoins

This has two major benefits:

  • Even though bitcoin itself is unregulated, bitcoin futures can be traded on regulated exchanges. So if you are concerned about the asset’s lack of regulation, this could be your go-to trade.
  • There are areas where trading bitcoin is banned. But thanks to bitcoin futures, investors can still speculate on the price of bitcoin.

Bitcoin futures work like other types of futures

When speculating on the future direction of bitcoin’s price, investors can either go long or short on a bitcoin futures contract.

Here’s a simplified example: suppose you own 1 bitcoin and it costs $10,000 (for this case only) , and you think its price will go down soon. You can sell a bitcoin futures contract at the current price, which is $10,000.

Nearing the settlement of the contract, bitcoin’s price, along with the price of the contract, dropped. You can now buy the bitcoin futures back.

If the contract trades at $8,000, close to the settlement date, you will have earned $2,000 as well as protected your investment.

As mentioned, this is a simplified example, and the exact terms of an actual bitcoin futures contract may be more complex, depending on the exchange.

Bitcoin futures contracts push bitcoin prices up in the short term

For instance, when bitcoin futures were first launched on the Chicago Board Options Exchange (CBOE), which is a regulated exchange, bitcoin’s price spiked nearly 10%.

In a similar manner, bitcoin broke the $20,000-mark in the run-up to the launch of bitcoin futures on CME, which is one of the world’s biggest exchanges.

Although it’s difficult to predict the longer term price, it’s quite obvious that bitcoin futures will continue to support the price of bitcoin, at least in the shorter term.

Reason why bitcoin futures support bitcoin prices:

  • Bitcoin futures are regulated on public exchanges, giving people the confidence to invest.
  • Institutional investors will more likely add bitcoin futures to their list of viable investment options and offer them to their clients.
  • Bitcoin futures bolster liquidity, which makes it easier for investors to buy or sell and trade cryptocurrencies.
  • Bitcoin futures open up the market to a wider investor base that includes countries where trading bitcoin has been banned.
  • And since futures are created to balance out the price fluctuations of the underlying asset, they can also lower the notorious volatility of bitcoin.

Bitcoin futures for the blockchain industry

Bitcoin somehow epitomizes the quality of all cryptocurrencies. If bitcoin’s price increases astronomically in a short span of time, more people will take notice. And when more and more people become aware of the cryptocurrency industry, the uptake of altcoins will also increase and push prices upwards.

The downside to this is that investors may ditch their altcoins in exchange for bitcoins. Large exits may cause a drastic drop in the price of altcoins.