What are Bitcoin Futures?
How is this different from the Bitcoin we are used to?
These are just some of the questions that are being asked, and here we will do our best to give answers to some of them.
What are futures?
Futures trading is an option for investors who have experience with trading a product and its derivatives that are specific in that their price changes frequently.
This way of trading is risky and attracts mainly investors who are willing to take risks, and this is certainly the case with every investor in Bitcoin.
Futures are financial contracts in which sellers and purchasers trade assets at fixed prices and dates.
This form of trading is mainly used to trade in bonds, currencies, capital indices or some commodities.
When you buy something, the exchange is done immediately. For example, if you give me $5 for 5 pounds of apples, I give you those 5 pounds of apples and we’re done. The exchange was made as we agreed.
With futures, it’s a slightly different deal. If we use the example above, we would agree on a fixed day and a fixed price when I will sell you apples and at what price. Specifically it would be, 05.03.2020. I will sell you 5 kilos of apples for $5, regardless of the market price of apples on that day.
So, a futures contract has two essential items: time and price. Of course, there are more differences and specifics, but in essence it is the whole concept of exchange in futures contracts.
You are not buying immediately, but we agree on a date and price.
Who uses futures contracts?
There are two groups of people who use these forms of arrangement and exchange.
- Producers of some raw materials and buyers of the same raw materials in order to distance themselves from drastic price movements. Here we will also use one real example, let’s say that you are an apple producer, you would sell a futures contract because that would protect you from the fall in the market price until you deliver the apples to the market. You could use this to make sure how much income you will have before you start the apple season, so you can optimize your entry costs so you don’t be at a loss. On the other hand, if you are an apple buyer, you would buy a futures contract to distance yourself from the price increase. That way, you can have the exact input costs for purchasing apples, if you arrange the work in advance, and you only need apples later.
- Traders who bet on prices in this way. Another group of people who buy and sell futures are classic traders, portfolio managers, hedge funds and various other institutions. In this group, the funds they are betting on are not actually delivered. For example, you can sell futures contract on apples without intending to actually sell apples. This time, the contracts are literally only for “bets” and are done exclusively with money, not funds.
What are the benefits of Futures Trading?
With such contracts, the idea is that you should invest a small percentage of the total price of the assets you are trading, which can greatly increase the gains but also the losses from the initial investment.
There is something called a deposit or initial margin, which is set for each futures contract by the stock exchange or institution through which it is traded.
The minimum amount of the initial margin usually ranges between 5% to 10% of the value of the total contract.
When the contract expires, that is, when the day comes when you have agreed on an exchange, you will be refunded the initial deposit together with the difference if you profited or your deposit will be reduced by the amount if you lost.
In this way, an investor with a small input investment can benefit from the entire contract.