For a lot of cryptocurrency investors, this is their first time investing in anything. Many people are self-taught and have to learn from their mistakes as they go (hands up who bought Bitcoin or ETH at an ATH?). But as the cryptocurrency market starts to mature, more options for investors are becoming available.
From alternative asset marketplaces that allow for the tokenization of real estate, artwork, and gold, to Bitcoin futures exchanges–they’re all vying for our attention. They say there are no stupid questions. So, if some of this terminology is new to you, fear not, a lot of fellow investors are in the same boat. Here goes:
How Do Bitcoin Futures Work?
Let’s start off with the concept of futures. Futures work as an agreement between two parties to buy or sell any asset on a specified day in the future at a specified price. Once the terms are agreed upon and the futures contract is entered into, the buyer and seller must transact at the agreed-upon price. It does not matter what the actual market price of the asset is on the day of the transaction.
What’s the point of futures? Well, futures trading is often used to manage risk. Although, as with any form of trading, you can win or lose on futures. In regular financial markets, futures are used to offset high volatility assets for goods that are regularly traded, like oil, for example.
So, say that oil prices are spiraling out of control and a country’s government wants to secure a long-term price that suits their budget. They can enter a futures contract with the seller. They can buy a six-month futures contract for the amount of oil they need at the set price of say, $70 per barrel. If the market price is higher when the contract expires, they save a bunch of money. Conversely, the reverse can also happen.
Futures markets obviously come with risks in every exchange but can often help to offset volatility, thus keeping suppliers protected against unexpected drops and allowing business and governments to trade at a price they can afford.
How Does This Relate to Bitcoin?
Bitcoin can be traded as an asset in futures contracts as well. The price of Bitcoin will be speculated on by both the buyer and seller. Futures markets allow Bitcoin to be traded on regulated exchanges, which in theory, should attract more enterprise and serious investors to this space who were earlier put off by a lack of regulation.
Here’s an example:
You own one Bitcoin worth (say) $7,000. But you’re worried that the price will drop in the future. You can enter a futures contract to protect your Bitcoin at the current price. When the settlement date approaches and the price has dropped to $4,000, you safeguarded your $3,000. If the price spikes, you sold yourself short.
While some people thought that the introduction of Bitcoin futures in December would shoot Bitcoin prices through the roof by attracting more investors, the reverse has actually happened so far. Many investors sold off their Bitcoin and Altcoin in the great bull run at the end of last year when the futures markets came in.
If you want to try your luck on Bitcoin futures, there are a few crypto exchanges up and running, including BitMex and Etoro. Additionally, CME Group and CBOE are also possible decent options, with plenty more service providers gearing up to enter this space.