What is the Bitcoin futures? Understand in detail

While captainvalor and enthusiasts look forward to the approval of the ETF on Bitcoin, we decided to learn more about this important step for mass adoption of cryptocurrency. Kodlari about the same expected launch Bitcoinfutures, a tsunami of institutional capital and the imminent departure courses on the moon. However, the miracle did not happen. Understand what is lucernae contracts and how they are able to influence the price of Bitcoin.

What are futures?

A futures contract is an agreement to buy or sell an asset at a certain future date at a specified price.

After the conclusion of the futures contract the parties are obliged to buy or sell the goods at the contract price per day of contract execution, regardless of the actual market price.

The goal is not necessarily to maximize profits. It is a risk management tool commonly used in financial markets for insurance against the risk of price changes regularly traded assets.

Futures are also used in investment portfolios to balance the fluctuations in the prices of particularly volatile assets.

These contracts are traded on the futures exchange acting as a mediator.

How futures contracts work?

Futures contracts have two possible positions: long or short.

Taking a long position, you agree to buy an asset in the future at a certain price when the contract term expires. Taking a short position, you agree to sell the asset at a specified price when the contract term expires. This can be explained on the example of an airlinethat wants to hedge against increase in the price of fuel, concluding a futures contract.

For example, jet fuel is trading at $ 2 per gallon. The airline in anticipation of rising oil prices buys three-month futures contract per thousand gallons at the current price. Thus, the contract costs 2 thousand dollars.

If at expiry of contract after three months, a gallon of jet fuel would cost $ 3, the airline will save a thousand dollars.

The vendor is happy to enter into a futures contract to ensure a stable market for fuel, even if prices rise. The same contract would protect him, if the price of fuel suddenly drops. In this case, both parties protect themselves from the volatility of fuel prices.

Instead use futures contracts as a protective mechanism, investors are able to speculate on them. They purposely take a long position at the low price of the goods. To increase the price of the contract becomes more valuable, and the investor may decide to sell the contract until its expiration to another investor at a higher price.

What is the Bitcoin futures?

Source: Unsplash

Futures can be used not only for physical but also for financial assets.

In the case of Bitcoin futures contract based on the price of BTC and speculators can make “bets” on its future price. In addition, investors can speculate on the price of Bitcoin without actually owning the coins.

It has two important implications.

First, since Bitcoin is still not regulated Bitcoin futures can be traded on regulated exchanges. This is good news for those worried about the risks associated with the lack of regulation in this industry.

Secondly, the Bitcoin futures allow investors to speculate on the price of bitcoins, where the trade in them is prohibited.

How do they work?

Bitcoin futures are the same as futures traditional financial assets.

Waiting for rising or falling prices of BTC, speculators take long or short positions in futures contracts on Bitcoin.

For example, if a person has one BTC at a price of 18 thousand dollars (hypothetically) and he is confident that the price will fall in the future, to protect it could sell a futures contract at the current price — $ 18,000.

Closer to the settlement date, the price of Bitcoin falls along with price of the futures contract. Then, the investor decides to buy Bitcoin futures. If with the approach of the estimated date the contract is trading at 16 million, then the investor earns 2 thousand. Therefore, selling expensive and buying cheaper, it will protect investments.

This is the simplest example of the action of Bitcoin futures. The precise terms of each futures contract can be more complex depending on the exchange, including the minimum and maximum price limits.

As Bitcoin futures affect the price of BTC?

In the short term this pushes the price upward surge of General interest in the cryptocurrency.

The next day after the launch of Bitcoin futures on the Chicago Board of options exchange CBOE the price jumped almost 10 percent to $ 16936.

Source: Cointelegraph

Similarly, in anticipation of the launch of Bitcoin futures on the Chicago Mercantile exchange CME, Bitcoin exchange rate broke the mark of 20 thousand dollars.

Source: Cointelegraph

Long-term effect on price is harder to predict, but most likely it will continue to push the price of BTC.

Does this mean that the price will rise?

There are several reasons why this should be so.

  • Because public exchanges futures Bitcoins can be regulated, it gives confidence to invest those who previously were skeptical due to the lack of regulation.
  • Institutional investors are more likely to offer futures on BTC to their clients as an effective investment option.
  • This gives the market more liquidity and making the purchase, sell, and trade cryptocurrency easier and more tempting.
  • This opens up the Bitcoin market to a broader investor base, including countries where cryptocurrency trading is prohibited.

Since futures are intended to balance the fluctuations in the price of the underlying asset, the price of Bitcoin could also become less volatile.

What this means for the industry as a whole blockchain?

There are several possible consequences.

First, Bitcoin is considered a kind of indicative of cryptocurrency. Therefore, in the case of a substantial increase in the price of BTC in a short time, whether because of the Bitcoin futures or something else cryptocurrency will draw the attention of more people. When the cryptocurrency industry know more people that use altcoins will increase, pushing their prices up.

The reverse scenario: investors may want to sell your altcoins for BTC to join in bullrun Bitcoin. A mass exit could lead to a dramatic collapse of altcoins.

It is more likely that strong altcoins like Ethereum, Litecoin and ripple’s in the footsteps of Bitcoin and will also be available through futures as only the interest from investors will be strong enough.

Where can I trade futures on Bitcoin?

There are two different markets for trading Bitcoin futures.

The first option is a separate cryptocurrency exchanges, including BitMEX and OKCoin. Cryptocurrency exchanges have long offered this option, but trade Bitcoin futures remains largely unregulated.

The second option is a public regulated exchange. This is a recent phenomenon and one of the reasons for the rapid growth of BTC price in December 2017.

It all started with the launch of Bitcoin futures on CBOE 10 Dec. Then followed the launch of the CME on 17 Dec. Brokerage firm type TD Ameritrade and JP Morgan also expressed interest in providing access to these markets.

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