Bitcoin, like other traditional assets, has a futures market. What is this about? What are futures contracts? If you want to know more about it, you got it right! We’ve already explained everything.
If you want to fully understand the functionality of futures contracts, it is worth knowing their status in the whole system of financial markets. The financial market, by definition, is the place where the purchase and sale of various forms of money capital is transacted. Each market segment trades in different instruments which have specific functions.
Different types of derivatives are traded in the futures market. How does this market work? First of all, it is based on trading contracts that have a specific future date. The most popular instruments of this option contracts, forward and futures contracts.
Futures contracts – what is it about?
A futures contract is simply a contract between two parties. It contains a long position – a contract with the buyer and a short position – a contract with the seller. It concerns trading operations with different assets that contain a fixed price. Futures contracts work according to established standards. This type of trading takes place exclusively on futures exchanges, which determine the characteristics of all contracts with great precision. It is important to take into account the resulting receivables and liabilities.
In simpler terms, two parties agree on the delivery of an asset at a specific price and time. This contract has its value and can therefore be traded. In this type of transaction, the buyer and the seller have their rights and obligations, which they must observe.
A position in a futures contract can last until the expiry of the contract. This is when the position is finally closed and the parties’ profits or losses are settled. It is not necessary to store the contract until it expires. If we have such a contract, we can sell it without any problems. There is, however, a liquidity condition, which is to find someone willing to buy this contract. Closing a position in the contract is based on taking the opposite position. What does this mean? If you have bought a contract, in order to sell it, there must be a buyer on the market who will take your place in the contract.
Chicago Board Options Exchange on December 10, 2017 implemented Bitcoin futures contracts. A week later a similar possibility was introduced by the Chicago Mercantile Exchange.
For this type of futures contract, the contract is based directly on the value of the digital currency. One party will be responsible for predicting a decrease in the current price – a short position, and the other party will analyze increases – a long position.
This makes the market even more influential for speculation, it is also connected with potential manipulations. These agreements also make it possible to manipulate the BTC price without having it. This makes it possible for a growing number of people who may be interested in creating futures contracts, but do not have the technical knowledge on the subject and the ability to store them safely. This solution has two main advantages:
• Cryptocurrencies are not covered by any regulations, but the exchanges already do. This will allow those who feared the lack of regulation to participate in the market.
• In countries where the government blocks the use of BTC, it is possible to use futures contracts, which allows investors to speculate about its value.
BTC trading mainly involves little or no supervision. It discourages institutional investors and exposes users to the risks associated with hacker attacks. It is no secret that most covert exchanges are not regulated. This is obvious for some reasons because the crypto market itself is not controlled. In BTC’s 11-year history, it has happened that the digital asset exchange platforms were insolvent. Therefore, investors are often not sure whether to use such services.
Futures contracts created on regulated markets give buyers greater certainty. Additionally, it does not eliminate the scale of profits achieved by the volatility of the crypto value. Futures contracts not only increase market transparency but also develop market liquidity.
The biggest advantage of futures contracts is the fact that investors can use them to make money from speculation and use leverage. This allows you to make more profit with less capital.
At the same time, investors who decide to use leverage have to be geared towards loss. This simply increases risk.
Impact on price
Market analysts believe that the possibility of entering into a position on BTC may put pressure on its value. However, this is too hasty a statement.
It is worth quoting here the statement of the American CME manager Tim McCourt, who believes that the futures markets on BTC are still too small to have a clear impact on the price of this asset. Smaller investors have more influence on value. In general, the integration of the traditional financial market with the hidden market will certainly influence the interest in digital assets. This in turn has a direct impact on their price.
The world of digital assets is still developing. Therefore, it is no surprise that more and more institutions are taking advantage of their opportunities. The possibility of using futures contracts is another stage of investing in Bitcoin and other cryptocurrencies.