Bitcoin Futures: Simply Speaking, But In Detail

The December of 2017 was marked not only by the historical maximum of BTC price, also, two of the largest American exchanges (CME and ITS) announced the beginning of trading in Bitcoin futures. In this article we'll talk about what futures are and what is the mechanism of their work on the cryptocurrency market. Contents: (please, click the topic to scroll down to it)

1. What are Bitcoin futures?
2. The mechanism of work
3. Exchanges where futures are traded for BTC
4. The amount of collateral and commission
5. Hedging of risks
6. Advantages of Bitcoin futures
7. The main risks
8. Conclusion

1. What are Bitcoin futures?

In short, futures is a contract where the price of buying or selling a particular asset is prescribed in advance. Futures contracts have been widely used in traditional markets for a long time. They are of two types:

• financial futures;
• commodities futures.

When we talk about the cryptocurrency market, only financial futures are applicable to it. In this contract, the cost of BTC is predetermined in advance for a certain period of time, after which traders who have concluded it are obliged to sell or buy Bitcoin at a fixed price. The execution of this futures contract does not depend on the real rate of the asset at the time when the futures expires.

2. The mechanism of work

The whole process of trading can be divided into three stages:

1. Determining the entry point. At this point, the trader is trying to predict the price of the asset in the future.
2. Waiting for the right moment. There can be two scenarios: the positive one and the negative one. In the first case, the trader was right and closed the contract with profit, and in the second one, the price went wrong and the trader needs to wait for the moment when it will be possible to close the deal with minimal losses.
3. Completion of the contract.

For example, a trader bought a month's Bitcoin futures for $6500. Everything is going well, the price is rising, and after the BTC contract expires, it is already $8000. In this case, the futures seller must sell Bitcoins to the buyer at a fixed price of $6500. In this case, the trader gets a profit of $1500. Well, if the price went down and reached, say $5500, then, respectively, the trader will suffer a loss of $1000.

3. Exchanges where futures are traded for BTC

There are two places where you can trade futures for BTC:

• CBOE (Chicago Board Options Exchange);
• CME (Chicago Mercantile Exchange).

After the conclusion of the contract, the parties do not directly contact each other, all processes pass through the exchange, which acts as a guarantor of the execution and also as an intermediary.

4. The amount of collateral and commission

Buying futures for Bitcoin at CME or CBOE, the trader does not need to pay for it at once. But in order to guarantee the transaction, he/she needs to put in a certain security deposit. If we talk about traditional markets, then, as a rule, the collateral varies in the range of 4%-10% of the asset value. But in conditions of increased volatility, which is an indivisible part of the cryptocurrency market, the size of the collateral can reach 30% and even 100% (the latter case is rather rare). The final amount of the collateral is calculated by determining the financial risks. For example, semi-annual BTC futures are almost impossible to forecast, so in this case, the collateral for the transaction can reach 100%.

5. Hedging of risks

Buying futures can have not only a speculative nature - you can also secure your assets from a decrease in value with their help. Let's say you have 30 BTC that you want to spend in a few months. But until then, the exchange rate can go down, and you can buy futures, to protect your assets, thereby fixing their price. Until the closing of Bitcoin futures, you are absolutely protected from fluctuations in the exchange rate. Thus, futures contracts are a good hedging instrument.

6. Advantages of Bitcoin futures

The main advantage in trading futures is the lack of the need for a large initial capital. For example, in traditional trading, in order to make a profit of $1000, you need to buy 1 bitcoin at a price of $6500 and wait until its price rises to $7500. To get a similar profit by trading futures for  BTC, you do not need to buy a whole Bitcoin, you only need to have a certain amount of collateral (it may differ depending on the market situation and the contract terms).

7. The main risks

The main risk in futures trading is the possibility of suffering large losses. You can either guess right or wrong. If the trader made an incorrect forecast, his/her funds will be transferred to the account of a more experienced or successful colleague. Given that Bitcoin can rise and fall within a few hours, it is almost impossible to 100% predict the price of a Bitcoin futures. Another dangerous situation, especially for an inexperienced trader, could be getting into the so-called "swing". Here you can suffer double losses. For example, initially a trader bought futures with the hope that the price would rise, then Bitcoin began to fall drastically, and the trader sells it with losses, waiting for the expiration of the futures. After that, the trader acquires futures with the hope of further reducing the value, but the trend turns around, and the rate goes up again, which brings him additional losses. So, trading futures for BTC requires a deep analysis of the market, as well as the cold and practical mind.

8. Conclusion

The launch of Bitcoin futures in December 2017 played a role in the popularization of cryptocurrencies. This tool attracted a certain number of investors from traditional markets. Many experts believe that the launch of BTC futures is equivalent to the official recognition of this coin. Like any other instrument, futures have their own weaknesses. For example, because of the high volatility, many traders sell their contracts, without waiting for the term of its termination, which leads to the rate depreciation. Nevertheless, the launch of Bitcoin futures is a very significant event for the entire cryptocurrency market. Subscribe to The Coin Shark news in Facebook: https://www.facebook.com/coinshark/