Bitcoin futures are one of the latest and most exciting developments in the world of cryptocurrency. They represent a major step forward for investors who are looking to take positions on the future price of bitcoin without actually owning the underlying asset. With the launch of bitcoin futures, investors can now trade 24/7 and take advantage of increased liquidity, which has transformed the way people invest in this digital currency.
Image Credit: https://bitcoinke.io/2020/08/bitcoin-futures/
So, what exactly are bitcoin futures? Simply put, a futures contract is a legally binding agreement between two parties to buy or sell a specific asset at a predetermined price at a future date. In the case of bitcoin futures, investors are betting on the future price of the digital currency. If the price of bitcoin rises, the futures contract will increase in value, and if the price falls, the contract will decrease in value.
The key benefits of trading in bitcoin futures is that it allows for more efficient price discovery and they provide a way for investors to manage risk.
Types of Bitcoin Futures:
There are two main types of Bitcoin futures contracts:
Physically-settled futures: These are futures contracts where the underlying asset, Bitcoin, is delivered to the buyer on the settlement date. This means that the buyer of the contract receives the actual Bitcoin they agreed to purchase in the contract. Physically-settled futures contracts are less common as they require the exchange to hold and manage the underlying Bitcoin.
Cash-settled futures: These are futures contracts where the underlying asset, Bitcoin, is not delivered to the buyer on the settlement date. Instead, the buyer receives the cash equivalent of the difference between the contract price and the market price on the settlement date. Cash-settled futures contracts are more common as they do not require the exchange to hold and manage the underlying Bitcoin.
It's worth noting that the most common type of Bitcoin futures contracts are cash-settled, which are traded on regulated exchanges such as the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). These contracts are settled in cash, meaning that the buyer or seller of the contract receives cash on the settlement date, instead of the underlying asset.
Additionally, Bitcoin futures can be classified as short-term or long-term contracts. Short-term contracts have a settlement date of one month or less, while long-term contracts have a settlement date of more than one month.
Bitcoin Perpetual Futures and Bitcoin Quarterly Futures:
Bitcoin Perpetual Futures and Bitcoin Quarterly Futures are two different types of Bitcoin futures contracts that are available for trading.
Bitcoin Perpetual Futures, also known as Perpetual Swaps, are a type of derivatives that have no expiration date. They allow traders to speculate on the future price of Bitcoin without having to worry about the expiration of the contract. Perpetual futures are settled in cash and have a funding mechanism that adjusts the price of the contract to the spot price, with a premium or discount.
Bitcoin Quarterly Futures, on the other hand, are futures contracts that expire on a specific date in the future, usually every three months. These contracts have a fixed expiration date, which means that traders need to close or rollover their position before the contract expires. This type of contract is settled in cash and the settlement price is based on the spot price on the expiration date.
Both Bitcoin Perpetual Futures and Bitcoin Quarterly Futures allow traders to speculate on the future price of Bitcoin and can be used for hedging and speculation purposes. The main difference between them is that one has a fixed expiration date, while the other does not.
It's worth noting that the choice of which type of contract to trade will depend on the trader's risk tolerance, investment horizon, and other factors. Some traders prefer the flexibility of perpetual futures, while others prefer the fixed expiration date of quarterly futures.
How to trade bitcoin futures?
Trading Bitcoin futures involves entering into a legally binding agreement to buy or sell a specific amount of Bitcoin at a predetermined price on a specific date in the future. Here are the steps to trade Bitcoin futures:
Choose a broker or exchange: Bitcoin futures are traded on regulated exchanges such as the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). You will need to open an account with a broker or exchange that offers Bitcoin futures trading.
Fund your account: Once you have opened an account, you will need to fund it with cash or cryptocurrency. You should also set up any necessary margin requirements.
Choose a contract: Bitcoin futures contracts come in different expiration dates, sizes, and types (Perpetual or quarterly). Choose the one that meets your trading strategy and preference.
Place an order: Once you have chosen a contract, you can place an order to buy or sell a specific number of contracts at a specific price. Orders can be placed through the broker's trading platform.
Monitor your position: After placing your order, you will need to monitor your position and make sure that it is in line with your risk management strategy.
Close or rollover your position: Before the expiration date, you will need to close your position by either selling your contracts or buying an equal number of contracts to offset your original position. You can also choose to rollover your position to the next expiration date, if that's your preference.
It's important to note that trading Bitcoin futures is a highly speculative and risky investment, and it's essential to carefully consider the risks before entering into a contract. It's also important to keep an eye on the regulatory environment surrounding Bitcoin futures and other cryptocurrency derivatives. Additionally, it's important to have a clear understanding of the futures market, how to use leverage, and how to manage risk before trading.
In conclusion, bitcoin futures represent a game-changer for investors who are looking to take positions on the future price of this digital currency. With the ability to trade 24/7, increased liquidity, and more efficient price discovery, futures provide investors with a range of new opportunities and benefits. However, it's important to understand that trading in futures also comes with its own risks, and it's not suitable for all investors. If you're considering trading in bitcoin futures, be sure to do your research and seek professional advice before making any investment decisions.
Bitcoin futures contracts provide a new way for investors to access the cryptocurrency market and take advantage of its growth potential.