Sat. Jun 10th, 2023

What Are Futures?

Typically, futures contracts are traded on a futures exchange, and are contracts between two parties to buy or sell a specific asset at a predetermined time in the future. 

The futures contract includes the quality, quantity, and price of the underlying asset. The buyer of the underlying asset is protected from the market movement of the asset since it is a trade that is agreed to be carried out in the future at a specific time and for a specific price. Because there is a commitment to buy or sell at the specified price, this can result in a profit or loss for the contract holder.

 As a general rule, finance contracts give the contract holder the ‘right’ to do something. Futures contracts, however, introduce a completely different concept by granting the contract holders (both parties) the right and obligation to perform the contract details. Some futures contracts require physical delivery of assets, while others involve cash payments. 

 What Are Bitcoin Futures?

In the same way that you can trade commodities and stocks as futures contracts, you can also trade bitcoin futures on a Bitcoin Exchange. 

It is a contract between two parties to buy or sell bitcoin at a specific price and date in the future. As of late 2017, the CME Group has introduced bitcoin futures contracts on the Globex electronic trading platform, which are settled in cash. CME CF Bitcoin Reference Rate is used to determine bitcoin futures.  

Unlike other futures contracts, Bitcoin Futures Trading don’t require bitcoin to be traded. Because they are agreements that settle in cash, no bitcoin is involved. You predict the price of bitcoin, not the underlying cryptocurrency asset, just as in other futures contracts. If you anticipate that bitcoin price will increase, you can take a long position; if you already hold bitcoin, you can take a short position to reduce the risk of possible losses. 

A bitcoin futures contract’s price is directly proportional to the price of bitcoin, so trading bitcoin futures is an alternative to spot trading, which involves buying or selling actual crypto.  

While spot trading offers fundamental trade orders such as buying low and selling high, you tend to make a profit during a market pump. Trading bitcoin futures, however, offers many advantages, including access to leverage during bull and bear markets. 

Types of Bitcoin Futures

There are several types of bitcoin futures markets today, and different platforms offer different types of derivatives trading. Currently, the most common derivatives in the investment space are Standard Futures contracts and Perpetual Swap contracts. In spite of the fact that both of these derivatives have distinct characteristics, you must understand them clearly before investing.

Futures Contracts VS Perpetual Swap Contracts

 We would explain bitcoin perpetual swaps and bitcoin futures contracts conceptually as follows: 

Bitcoin perpetual swaps have no expiration date. It is basically infinite; there’s no end. However, bitcoin futures contracts have an expiration date, so there’s a period to honor the contract. This typically takes a month or two.  

A price syncing system called the funding rate mechanism is used by exchanges since perpetual swaps do not have expiration dates. It stabilizes perpetual swaps’ short and long positions by adding or subtracting trades. Essentially, it’s a fee that helps maintain the perpetual swaps’ short and long positions. 

It is also noteworthy that perpetual swaps typically keep a record of the spot market, which might appeal to crypto traders. Nevertheless, volatility is a significant risk associated with perpetual swaps. Therefore, during market volatility, the price of a perpetual swaps contract tends to move away from the spot price.

The perpetual swap eliminates the need to constantly reestablish long and short positions, similar to bitcoin futures. By exchanging coin swaps between traders in long and short positions, the perpetual price converges with the spot price. As the expiration date approaches, the terms of the contract and the asset involved automatically converge, so it is not necessary to maintain a price sync with bitcoin futures.

Leave a Reply

Your email address will not be published. Required fields are marked *