Contents
A comprehensive guide to everything you need to know about cryptocurrency futures: what they are, how they work, and why they’re important.
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Introduction
Crypto futures are contracts that derive their value from an underlying cryptocurrency asset, such as Bitcoin. These contracts enable traders to speculate on the future price of the asset without having to actually hold the digital currency.
Crypto futures are traded on dedicated cryptocurrency exchanges and provide a way for traders to bet on the future price movements of popular digital assets without having to actually own them. Many of these exchanges also offer leverage, meaning that traders can control a larger position than what they would be able to with just their own capital.
Crypto futures can be traded with long or short positions. A long position is where the trader bets that the price of the underlying asset will increase, while a short position is where the trader bets that the price will fall.
What are Futures?
Futures contracts are agreements to buy or sell an asset at a future date at a predetermined price. Futures contracts are standardized so that they can be traded on futures exchanges, such as the Chicago Mercantile Exchange (CME). In the case of cryptocurrency futures, the asset is usually a digital currency, such as Bitcoin or Ethereum.
What are Cryptocurrencies?
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control. Bitcoin, the first and most well-known cryptocurrency, was created in 2009. Cryptocurrencies are often traded on decentralized exchanges and can also be used to purchase goods and services.
What are Crypto Futures?
Crypto futures are simply futures contracts that are denominated in a cryptocurrency. A futures contract is an agreement between two parties to buy or sell an asset at a certain price at a future date. Crypto futures contracts are similar, but the underlying asset is a cryptocurrency, such as Bitcoin or Ethereum.
Crypto futures can be traded on traditional financial exchanges, such as the Chicago Mercantile Exchange (CME), as well as on dedicated cryptocurrency exchanges, such as Binance.
The most popular crypto futures contract is probably the Bitcoin futures contract traded on the CME, which was launched in December 2017. However, since then, many other exchanges have launched their own crypto futures products. For example, Binance offers crypto futures for a number of different cryptocurrencies, including Bitcoin, Ethereum, Litecoin and Ripple.
The benefit of trading crypto futures is that it provides investors with a way to speculate on the future price of cryptocurrencies without actually owning any tokens. This means that you can trade crypto without having to worry about storing it securely or paying taxes on your gains (although you will still need to pay taxes on any gains when you eventually cash out your position).
Another benefit of trading crypto futures is that it allows you to leverage your position. This means that you can control more value than you have invested, which can lead to larger profits (or losses) if the market moves in your favor (or against you).
However, it is important to note that leverage also magnifies losses, so it is important to use it carefully.
How Do Crypto Futures Work?
Crypto futures are a type of contract that allows two parties to speculate on the future price of a digital asset. The buyer of the contract agrees to purchase the asset at a predetermined price, while the seller agrees to sell the asset at that same price. Crypto futures contracts are similar to other types of futures contracts, such as those for commodities or stocks.
Crypto futures contracts are traded on exchanges, and the price of each contract is determined by the market. When the contract expires, the buyer and seller can either settle their obligations or roll over the contract into a new one.
Crypto futures can be used for hedging or speculation. Hedgers use crypto futures to protect themselves against price swings in the underlying asset. For example, a cryptocurrency miner could buy a crypto future to lock in the price of Bitcoin they will receive for their mined coins. Speculators use crypto futures to bet on the future price movements of an asset.
Bitcoin futures were first introduced in 2017 by CME Group and CBOE Global Markets. These contracts allowed investors to bet on whether the price of Bitcoin would rise or fall over a certain period of time. Since then, other exchanges have launched their own crypto futures products
Who Can Trade Crypto Futures?
Crypto futures contracts are traded on a regulated exchange and can be bought and sold by anyone who has an account with the exchange. In order to trade crypto futures, you will need to open an account with a broker that offers crypto futures trading. Some brokers require you to have a specific account type in order to trade crypto futures, so be sure to check with your broker before opening an account.
Crypto futures contracts are settled in cash, meaning that no actual cryptocurrency is exchanged hands when the contract is closed. This makes it different from other types of cryptocurrency investments, such as buying and selling cryptocurrency on an exchange or investing in a cryptocurrency ETF.
What are the Benefits of Trading Crypto Futures?
Crypto futures offer a number of benefits to traders, including the ability to go long or short on digital assets, trade with leverage, and take advantage of both rising and falling markets.
Crypto futures contracts also provide greater price transparency and liquidity than traditional spot markets. This is because crypto futures are traded on regulated exchanges with standardized contract sizes, tick values, and expiration dates. As a result, crypto futures are less likely to be subject to manipulation and can be traded more easily.
Another benefit of trading crypto futures is that they can be used to hedge against risk in a portfolio. For example, if you own a large amount of Bitcoin but are worried about a potential price drop, you could buy a Bitcoin futures contract to lock in a selling price for your Bitcoin. This would allow you to sell your Bitcoin at a predetermined price, regardless of what the actual market conditions are at the time.
What are the Risks of Trading Crypto Futures?
Given the volatile nature of cryptocurrencies, it should come as no surprise that crypto futures are also risky. In fact, crypto futures are considered to be even riskier than traditional futures contracts. This is because cryptocurrencies are highly susceptible to price manipulation and sudden changes in market sentiment.
Furthermore, crypto futures contracts are often traded on unregulated exchanges, which adds another layer of risk. These exchanges are not subject to the same rigorous rules and regulations as traditional exchanges, which means that they may be more prone to fraud and market manipulation.
Investors should also be aware of the potential for “flash crashes” in the crypto market. A flash crash is a sudden and drastic drop in prices that can occur in a matter of minutes or even seconds. These crashes can be caused by large sell orders, technical glitches, or even rumors and news stories.
While flash crashes are relatively rare, they have occurred in the past and could potentially occur again in the future. For this reason, investors need to be careful when trading crypto futures and always have exit strategies in place in case of a sudden market drop.
Conclusion
Crypto futures are a type of financial contract that allows two parties to agree to trade cryptocurrencies at a predetermined price at a future date. These contracts can be used for hedging or speculation, and they can be traded on exchanges like Bakkt, CME Group, and LedgerX. Futures contracts have the potential to make the crypto market more accessible and liquid, and they could play a role in helping cryptocurrency assets become more mainstream.
