BTC Futures Contracts: What Are They?
Basically, a futures contract is an agreement of promise. It indicates that an asset will be sold or bought at a predefined price on a specific date. Signed in the past, this contract obliges both parties to complete the agreement in the future regardless of the price changes. The idea behind futures contracts is not profit gaining. Quite often, this asset is used as a risk management instrument that allows preventing significant losses. This type of contracts is common for portfolios as it helps keep funds safe from price fluctuations.
There are two types of futures contracts. In case you act as a buyer, it is called a long contract. Its main purpose is to save funds if you understand that the product price may be higher and do not want to pay extra money. If you act as a seller, the contract is called a short contract. Its main idea is in selling goods at a fixed price and keep money income stable regardless of the market fluctuations.
Here is an example. Suppose, a farmer buys gas for a combine harvester for $3 per liter. If the market gas price tends to increase, futures contracts are profitable investments. The farmer buys futures for 100 liters. So if the price exceeds $5, each liter saves $2.
A supplier has their own interest. Since the market is quite unpredictable, having some reliable income in the future is valuable. A single contract is intended to protect both parties as they are willing to avoid risks.
Futures are applicable in the area of financial trades. The objects of futures do not have to be physical. This means that bitcoin futures contracts are also possible. Everything described above is also true for this kind of contracts, including speculation issues, funds saving, long and short contracts. This brings up some new opportunities. Considering BTC as an unregulated asset, its futures contract becomes a common regular exchanges means. Moreover, if bitcoin is forbidden to be traded, its futures may still be legal.
All main principles are kept the same for the trading process. Speculators have to decide whether BTC price will go up or down basing on the market information, insights, rumors and trends. After the decision it made, a contract is signed and both parties start waiting for its execution time.
Let’s assume BTC price is at the $15,000 level. All bitcoin holders expect the drop and want to save their funds. Traders can use futures contracts as a risk prevention method. They propose contracts with a stable price of $15,000. Once the price falls to $10,000, those futures are still implemented for the previous price, thus saving the investor funds.
Futures have an influence on BTC price as well. For instance, the next day after Chicago Board Options Exchange (CBOE) accepted BTC futures, bitcoin cost jumped by 10%.
Does this all mean that BTC price can go up? It is possible. Bitcoin futures are regulated just like any other securities, thus they can overcome people skepticism one day. Investments will be considered as more reliable and confident. In this regard, many official investing organizations will start advising their clients to work with BTC futures. Evidently, this will have a positive influence on the Bitcoin market.
Bitcoin futures can be used on several markets. The first type is crypto exchange platforms, like BitMEX and OKCoin. This option is already common for those exchanges, yet the most of their contracts do not fall under any kind of regulation. Public exchanges with their regulation are the second option. They are quite new and still have a lot of opportunities.