The Bitcoin Futures Market: How Does It Work?

The Bitcoin Futures Market: How Does It Work?

While many cryptocurrency assets have some real use cases and are used by thousands of people to pay for products and services, most people in the bitcoin exchange are investors. They purchase a cryptocurrency and hope that the value will increase while they hold the asset, so they can sell it to receive a profit at some point.

Investing in crypto is generally quite simple as there are several high-quality exchanges and platforms that allow you to sell and buy crypto in seconds. Signing up for these platforms is easy and straightforward, as is using most of their features and services.

However, there are other ways of investing in cryptocurrency like Bitcoin. For example, investing in the Bitcoin futures market is quickly gaining steam that’s becoming more and more popular. But what exactly are these investments, and how do they work? Well, if that’s a question you have in mind, you’re in luck. This article is going to look closely at not only what Bitcoin futures are and how they work, but which are their benefits and where they can be bought and sold.

What are Bitcoin Futures?

To make clear what Bitcoin futures are, we are going to divide the explanation into several steps. The first step is to understand the definition of what is a futures contract. So, it is an agreement to buy or sell an asset. At the agreed time, involved parties perform their obligations. Means, a seller sells the asset that is declared in the contract and the buyer buys it. The price of buying/selling is equal to the one, mentioned in the contract.

These can be done in the commodities market, stocks, precious metals, and many other industries. Futures are often used by traders to speculate on where the price of a specific asset will go. They can also be used to hedge risk and protect yourself as an investor. As you can imagine, a Bitcoin future is simply a futures contract that takes place in the Bitcoin market instead of the stock market, crude oil or metals market.

In a Bitcoin futures contract or any future contracts for that matter are between a party with a short position and one with a long position. The party with the short position is agreeing to sell the asset at a certain price at a certain time, while the party with a long position has agreed to buy it. Each side makes the deal in hopes that the market price will end up going in their favor.

So if you ever hear someone taking a “short” or “long” position, that essentially means that they are getting involved in a futures contract of some kind. Since 2017, people have been able to use Bitcoin futures to speculate on the future price of Bitcoin.

Risks and Benefits of Bitcoin Futures

Speculating on the future prices of Bitcoin can lead to incredible profits if the market dips or rises in your favor. These futures allow you to become involved in this speculation without actually having to hold any Bitcoin at the time, as long as you can fulfill your long or short position when the time comes.

The availability of futures provides Bitcoin traders with far more instruments to invest how they want, from short selling to leveraged trading. Also, most part of the Bitcoin futures market is regulated, which ensures everything is done fairly as everyone needs to abide by the very same set of rules. This regulation can also attract more professional investors, which will only help Bitcoin to get more liquidity. The availability of Bitcoin futures contracts also offers price transparency as these contracts are settled daily, and a transparent reference price is used in all of these contracts.

Of course, these futures contracts also come with a ton of risk. For example, if you try to short Bitcoin by borrowing it, and the prices rise, you will not only lose your initial investment but potentially much more. Also, some Bitcoin futures contracts can be difficult for the everyday investor to participate in as the requirements can often be quite high.

Also, whenever dealing with futures, there is always the risk of the prices’ manipulation. Huge investors can place massive sell orders on the asset that can lead to a bearish market, where other sellers are forced to sell before the price dips too low. All of these risks should be weighed against the potential benefits before you invest.

Where Can Bitcoin Trades be Done?

Bitcoin futures became available to invest in back in 2017 when the CBOE Futures Exchange first introduced them. Another regulated exchange, CME, launched support for trading Bitcoin futures soon after. More and more exchanges have now joined the market and have begun offering support for those types of investments as well. Don’t be shocked to see more and more regulated exchanges supporting Bitcoin futures.

Another option is to invest in your Bitcoin futures on a cryptocurrency exchange. While not every exchange offers this support, many do. BitMEX, OkeX, OKCoin, and others allow you to invest in Bitcoin futures right on the platform.

Of course, be sure to do your research on which exchange or platform makes the most sense for you. They might have different fees, offer different options and have additional rules. Do some studying to find out which is the best choice for your wants and needs.

In conclusion, we hope that this article has been able to help you learn a little more about Bitcoin futures, their pros and cons and how they work. Of course, before investing in crypto futures, or any cryptocurrency for that matter, be sure to do your own independent research on what makes the most sense for you. The market is volatile and futures can be even riskier, so be sure it is something you want to do.

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