Understanding Bitcoin Futures

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What are futures?

Futures are an agreement to purchase or sell an asset on a particular future date at a particular price.

Once the futures contract has been entered, both parties need to purchase and sell at the agreed-upon value, regardless of what the real market price is at the agreement execution date.

The objective isn't really profit maximization. It's a risk management tool, frequently utilized in financial markets to hedge against the risk of changing prices of assets that are purchased and sold all the time.

Futures are additionally utilized as a part of portfolios to balance out price fluctuations on investments, where the underlying value is particularly unstable.

These contractss are arranged and traded on a futures exchange which acts as the intermediary.

How do futures contracts work?

There are two positions you take on futures contract: long or short.

If you take a long position, you accept to purchase an asset in the future at a particular price when the contract lapses. When you take a short position, you agree to sell an asset at a set price when the contract ends.

A simple way to explain this is the case of an airline who wants to hedge against the rising cost of fuel by going into a futures contract.

Say jet fuel trades at $2 per gallon. An airline expecting the price of oil to rise, purchases a three-month futures contract for 1,000 gallons at current prices. The contract is, hence, worth $2,000.

If in three months, when the agreement lapses, the cost of one gallon of jet fuel is $3, the airline saved $1,000.

The provider will happily go into a futures contract with a specific end goal to guarantee a steady market for fuel, even when prices are high. Furthermore, a similar contract will likewise protect them if the price of fuel surprisingly drops.

For this situation, the two parties are protecting themselves against the fluctuation of fuel prices.

There are also speculators who speculate with futures contracts instead of using it as an protection mechanism.

They will intentionally go long when the commodity price is low. As prices rise, the agreement turns out to be more valuable, and the investor could choose to exchange the contract with another investor before it expires, at a higher price.

What are Bitcoin futures?

Futures are not only for physical assets; they can be traded on financial markets also.

With Bitcoin futures, the contract will be established on the price of Bitcoin and speculators can put a "bet" on what they believe the price of Bitcoin will be in the future.

Moreover, it allows investors to speculate on the price of Bitcoin without actually owning Bitcoin.

It has two major outcomes.

firstly, while Bitcoin itself stays unregulated, Bitcoin futures can be traded on regulated exchanges. This is great news for the individuals who are worried about the industry's lack of regulation.

Second, in regions where trading Bitcoin is prohibited, Bitcoin futures still enable speculators of Bitcoin.

How would they work?

A Bitcoin future will work on the very same principles as futures on tradtional financial assets.

By anticipating whether the price of Bitcoin will go up or down, speculators will either go long or short on a Bitcoin futures contract.

For instance, if an individual owns one Bitcoin priced at $18,000 (theoretically) and anticipates that the price will drop later on, to secure themselves, they can sell a Bitcoin futures contract at the present value, which is $18,000.

Near the settlement date the price of Bitcoin, alongside the price of the Bitcoin futures contract, would have dropped. The investors now chooses to buy back the Bitcoin futures.

If the contract trades for $16,000 near the future settlement date, the investor has made $2,000 and therefore secured their investment by selling high and buying low.

This is a fundamental case of how Bitcoin futures work and the correct terms of every future contract might be more complex depending on the exchange, which will include minimum and maximum price limits.

What do they mean for the entire Blockchain industry?

There are different possible outcomes.

In the first place, Bitcoin is viewed as a kind of poster-boy for cryptocurrencies. In this way, if the price of Bitcoin sees massive increments in a short space of time, regardless if this is because of Bitcoin futures or something else, more individuals tend to take notice.

As more individuals end up mindful of the cryptocurrency industry, the uptake of altcoins will rise and push prices upwards.

The flipside is additionally conceivable; investors might want to sell their altcoins for Bitcoins in order to participate in its bullish run. Large scale exits could cause a drastic drop in the price of alternative cryptocurrencies.

The likely scenario is that most of the more grounded altcoins, as Ethereum, Litecoin, Ripple, and so forth., may follow in the footsteps of Bitcoin and end up tradeable as futures too, once enthusiasm from investor becomes solid enough