Crypto futures is one of the most crucial financial derivatives product available in the crypto market. They are used to hedge and speculate regarding the future prices of digital assets. The bitcoin futures contract is one of the most widely traded crypto futures.
For ages, Finance has been going through numerous innovations. These innovations have helped ease access to money and created intriguing ways of interacting with value. Currently, in the markets, we get to witness numerous financial instruments used for various functions. From derivatives that became the foundation of the downfall of financial institutions in 2008 to futures and options. With the recent invention of cryptocurrencies, innovations have taken a new speed. The crypto industry has been quick to pivot and provide these financial instruments within their own package. Today we will go through crypto futures. Let’s dive right into it!
What are crypto futures?
Crypto futures are a type of derivative product in the form of a contract. Essentially, it is an agreement between two parties to either buy or sell an asset at a predetermined price on a predetermined date. The price of this futures contract changes over the course of its life due to daily trading activities. In the case of crypto futures, the underlying asset is a token or a coin (a digital asset supported by blockchain technology). Therefore, in essence, they have a maturity date, a selling price (value determined by the market), and a future price.
Uses of crypto futures
Crypto futures provide an opportunity to enhance the gains on a particular asset. At the same time, there is a risk of losing money on a bad bet. The crux of its job is to allow people to speculate on the future value of an asset. For example, if you expect the price of Bitcoin to be at $50,000 on 1st Feb 2022, then you would buy a futures contract that says otherwise. Therefore, earning you the difference.
A real life implementation of a future contract will be as such. First, you buy the contract to buy a digital asset at a price stated in the future. Let’s say your expectation is that the price on the future date will be higher but the price stated in the future contract is $30,000. Therefore, on the D-day, you would be able to buy Bitcoin for $30,000 instead of the $50,000 market price. Therefore making you money. There are many such contracts. Amongst these, the Bitcoin futures contract is one of the most widely traded crypto futures contracts. It’s traded on the Chicago Mercantile Exchange (CME).
Pros and Cons of Crypto futures
Like anything else in this world, Crypto futures also have a good and a bad side. Let’s discuss the pros first. First, it allows tracking the movement of crypto assets without having a digital wallet. Second, it allows for hedging against the future. Third, it offers liquidity since these futures are easily tradable. Fourth, futures allow you to leverage through a margin account. On the other hand, the cons are as such. First, You can’t use futures as a medium of exchange, you will have to liquidate it. Second, the margin requirement for retail investments may be too big to service.
The debate about the pros and cons of crypto futures will keep going on. But, in the meantime, there are a lot of people who trade them on a daily basis. Go try out your own luck!