Crypto Investors Guide To Trading Bitcoin Futures: Here’s Everything You Need To Know
Everything You Need To Know About Trading Bitcoin Futures
One of the most confusing parts of the crypto space for new cryptocurrency traders is Bitcoin futures. To explain them, we should first note that futures themselves are valid agreements that revolve around selling and buying different assets for a fixed amount, and on an exact, previously determined date in the future.
Futures trading is done through futures contracts, which allow traders to settle transactions at a specific time, for a specific amount.
Bitcoin Futures Trading: The Basics
After creating a Bitcoin futures contract, parties involved can go forward with their transaction, which revolves around buying and/or selling Bitcoin. As mentioned, the price of the purchase or sale is previously agreed upon by both parties, and it can be entirely different from the current market price of the coin.
The principle is identical to the one used for futures of traditional financial assets. As such, Bitcoin futures can be viewed as a type of risk management tool that is used for balancing out big price fluctuations and volatility that follows. The process can have two primary positions, called the “short” position, and the “long” position.
Similarly to margin trading, any of the included parties can choose the short or the long position. However, it is usually the buyer that chooses to take the short one, in an attempt to obtain the best price. The seller, on the other hand, opts for the long position, hoping to sell Bitcoin at the highest price possible by the time the contract expires.
What Are The Advantages Of Trading Bitcoin Futures?
Simply put, both parties seek an advantage and are attempting to ensure their safety from high volatility which often accompanies Bitcoin. The futures themselves allow them to speculate on Bitcoin's future value without having to actually own the coin. Futures can be traded on regular exchanges and on financial assets alike.
The biggest advantage in the process is that investors may speculate on the price of BTC even in those areas where trading cryptocurrencies is not allowed. As there is no actual purchase or sale of Bitcoin itself, futures are not included in the Bitcoin ban. Furthermore, futures can be traded at any time during the settlement's lifetime.
Another advantage is that traders can choose to only put a fraction of the full contract as a margin. This allows them to benefit from the price swings of the entire contract. Not only that, but neither party has to agree immediately on the completion of any transaction. Trading futures makes the market more convenient, it reduces the risks, and it allows anyone to get involved in crypto trading, indirectly.
In addition, the futures are leveraged, meaning that investors can control large amounts of an asset by investing small amounts of money. In case of Bitcoin futures, by buying a contract, traders can benefit from someone else who actually holds the asset for them. This allows them to use their money for other purposes.
It is expected that Bitcoin futures will help with increasing the efficiency of the Bitcoin market in following years. Some experts even believe that futures can reduce the high volatility. While the price of futures tends to be higher than the current price of an underlying asset, the difference is typically not that big.
Bitcoin Futures Trading
At this time, trading Bitcoin futures is not completely regulated. Despite this, cryptocurrencies continue to attract attention, and more brokers are considering the crypto market. As a result, it is expected that the current situation will change at some point.
While unregulated, Bitcoin futures trading is still possible on several exchanges, such as BitMEX and OKCoin. There are also publicly regulated exchanges like the CME (Chicago Mercantile Exchange), the CBOE (Chicago Board Options Exchange), while Nasdaq is also expected to open up to Bitcoin futures trading at some point in 2019.
It should also be noted that trading BTC futures on the CME requires finding a broker that already trades there, and is willing to start trading on your behalf, which often includes a certain fee.
Bitcoin Futures Price Establishments
When it comes to determining the price of Bitcoin futures, there are three elements that traders should keep in mind. Those are the expiration code, the bid, and the ask. The expiration code is a specific date in the future that both parties agree on, and it marks the time when the contract will expire. The bid is the buying price, while the ask is the selling price.
There are also three roles for agents who operate or interact with the prices in some way — a market maker, an individual speculator, and an arbitrageur.
Trading Bitcoin futures is still considered to be a thing of the future, mostly due to the current lack of regulation. However, due to numerous benefits such as adding more liquidity to the market and reducing risks, experts predict that trading Bitcoin futures will eventually become more popular. It serves the market in several ways, including opening it to a larger audience, including anti-crypto countries, and providing a safe method for institutions to join the crypto space.