Bitcoin Futures Explained In Under A Handful Of Minutes For Crypto Traders
Everything You Need To Know About Bitcoin Futures
Bitcoin futures contracts gained a lot of popularity in recent years, as traders started seeking alternative trading techniques in order to make a profit. While it is quite possible to do spot trading (instant trading, where the deal is concluded immediately), futures contracts involve arranging a trade that happens in the future.
Simply put, they revolve around agreements that will be settled at a specific time and quantity. The two factors that affect the trade are the price at which the contracts are being settled, and the delivery date itself.
Futures contracts typically offer high leverage, with traders only having to invest a small amount in order to profit from price changes. Traders can also choose to take short positions to make a profit if the price is expected to drop. However, one big difference from regular shorting is that traders do not need to borrow the underlying asset, which reduces the friction of shorting.
Who Uses Futures Contracts?
Futures are typically interesting to two types of people — hedge traders and speculators.
When it comes to hedge traders, these are often miners who mine Bitcoin and wish to protect themselves from the possibility of a harsh drop, which is more than possible due to high volatility. Future contracts are a useful tool to hedge against price changes that might come in the future. Those who purchase coins this way are usually those who wish to secure buying the coins at a lower price — if they expect it to rise.
As for the speculators, those include day traders, portfolio managers, hedge funds, and similar institutions. They view futures as very profitable due to the high leverage and quick price movements.
Anyone can buy Bitcoin futures, with a relatively low minimum price per contract.
How Does The BTC Price Affect The Price Of BTC futures?
When we are talking about Bitcoin futures, it is logical to assume that the price of Bitcoin affects the price of the futures contracts in some way. Large differences in prices between the two are cut down because of arbitrage. In other words, if the futures contract is more expensive than Bitcoin itself, traders can buy BTC and sell the contract. Due to the fact that the contract price is higher, traders can buy a futures contract with a settled price, which allows the seller to make a profit due to the price difference. Obviously, the amount earned depends on the price difference.
The difference between the price of Bitcoin and the price of futures contracts may come due to an imbalance between Bitcoin's supply and demand. This happens when it is expected that there will be either a shortage or an oversupply of coins in the future. In addition, the potential interest, as well as the cost of storing the coins may also result in a slightly higher price of the contracts when compared to the price of Bitcoin.
Futures are also useful because they can reduce the price volatility, and even affect the entire market by increasing its efficiency. This is a long-term benefit, however, while in the short-term, the volatility may even go higher than it usually would due to an increase in demand.