Understanding the working and implications of Bitcoin Futures.
As the cryptocurrency market is very volatile, it is challenging for the newbies in the domain to handle such scales of fluctuations. It is clearly self-evident that the prices of Bitcoin and other Altcoins can move by almost 10% – 20% within the span of 24 hours itself. The market prices are dependent on the market forces of demand and supply, and the market is not backed by any working product or service of a company, hence the price is independent of that. This is the precise reason of the for the volatility of the crypto market. Hence a stabilized version needs to be incorporated for specific purposes. Bitcoin Futures offers such a service.
Futures in general
First of all, let us try to decipher the meaning of Futures. In economic terms, Futures are nothing but contracts which are to be executed in future between two or more parties at designated price and time. It is to be clearly mentioned, that the price designated in the contract may not be changed at the time of its execution if at all the price fluctuates and has altered until then. This feature might lead to a loss of one of the party and profits to the other. Nevertheless, it is not to maximize the profit but it is a risk management tool, in order to stabilize the fluctuations in the actual market prices. Such Future contracts are traded on a third party intermediary in the form of exchanges.
What are Bitcoin Futures?
In a Bitcoin Futures contract, the underlying asset which is kept for future trading is Bitcoin and the other working methodologies remain the same. Bitcoin Futures was introduced and put forth by two of the major exchanges, Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), in December 2017, when the initiative got an affirmative response from the Commodity Futures and Trading Commission (CFTC) hence Bitcoin Futures might also be considered as a completely legitimate way of Bitcoin trading. Bitcoin Futures are deemed to be suitable for short to medium term investments, whereas Bitcoin is preferable for long-term hodling.
How does Bitcoin Futures work?
Let’s try to elaborate the concept of Bitcoin futures to understand it clearly, which can easily be done through an example. Imagine that persons A and B enter into a Bitcoin Futures contract where the contract is to be executed two months ahead of the current date and the contract is to buy 1 bitcoin, at the price of $10,000 by person B from A with the current market price being $8,000. Here person A is preferred to be on the short end and person B on the long end since B is buying.
Now, if the price has increased to $12,000 after two months the trade is executed where 1 Bitcoin is sold by person A to B at $10,000 only. It is clearly a profit of $2000 for person B. Hence they have secured themselves of the price fluctuations.
How Bitcoin Futures affect the cryptocurrency market?
As Bitcoin Futures are the regulated form of investment, it is more likely to be accepted by the masses of people who are skeptical about the unregulated nature of the cryptocurrencies. Therefore, it indirectly helps in increasing the interest in the cryptocurrency space. Many institutional investors also open up opportunities for their clients to invest in them. Although Bitcoin is the only cryptocurrency who’s Futures are available, in future it is more like that other permanent cryptocurrency like Ethereum, Litecoin, Bitcoin Cash, Ripple, etc would initiate such Futures contracts with respect to their cryptocurrencies as well.
While Bitcoin Futures have gained a lot of popularity in the cryptocurrency domain they are mostly traded on two of the most prominent cryptocurrency exchanges which are BitMEX and OKCoin. However, they are traded as a completely regulated commodity on standardized exchanges of Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). It is also speculated by the experts that Bitcoin Futures might assist in bursting the cryptocurrency Bubble which is looming over the domain. Also, this is an indirect centralization of Bitcoins, which is contrary to the concept of Centralisation which might cause hindrances to its development.