Bitcoin futures: what’s the matter?
What are futures?
Today a lot of traders are interested in what futures (futures contract, futures) are and how they influence bitcoin rate. We will further describe the matter.
The idea of futures is that the parties arrange the trade (asset sale) terms in advance (exact contract date, asset amount, and price). The contract terms cannot be further changed the parties under any condition. Even if market conditions does not contribute to the successful deal for a buyer, or a seller wants to sell an asset to someone else, the one-sided contract breach at the price of another party’s interests will be unacceptable.
That is how the answer for a question “what are futures?” is as it follows: is a solid contract ensuring the parties’ interests under the accomplishment of a deal on stipulated conditions.
The futures as we know them today first appeared in Japan in the XVIIIth century. The farmers used futures to optimize the expenses for the agricultural works at the beginning of the agricultural season to understand what profit can be expected after the season is over, and the part of the harvest, which is not purposed for individual use, is sold.
When concluding a contract the parties considered the possible price fluctuations, and low harvest risks. As a result, they could come to the mere average amount of the future profit gained from the harvested crop. The farmers did not receive money for the harvested crop when concluding a contract, but at the end of the season, after the actual harvest transfer to a buyer. With that the actual market price of the transferred harvest could not always correspond to the money paid. The most important was not such correspondence but exact accomplishment of the mutual obligations stipulated at the beginning of the season (the whole harvest was exchanged to the stipulated price).
Since that time the principal idea of futures has not changed much, unlike to the sphere of its application. Futures are used as financial instruments on the majority of product and currency markets characterized by actual accomplishment of the mutual obligations of the parties.
Futures and bitcoin trade: how does it work?
Now we shall discuss how futures can be traded when undertaking bitcoin operations.
Supposing a trader is expecting for the bitcoin price growth to $16 000, under the current price of $15000, in a week, for example. A trader makes a decision to buy BTC futures with a deadline of 7 days and price of $15 200 (in practice the actual price of the majority of futures is higher than a market one).
With that there is an opportunity to pay for a part of futures’ price at the cost of leverage provided by a cryptocurrency platform (can be compared to margin trading). Supposing the selected maximum value of leverage is 1:5. Then a trader needs to make security deposit for futures in the amount of 15200/5=3040 USD. This is the amount of money that a trader risks with. Certainly, the higher the leverage is, the lower the security deposit amount is, and the higher the risks to lose it is due to the unfavorable rate movements.
Supposing market bitcoin price reached 16 000 USD before futures performance date, and credit interest were 85.12 USD. In this case net profit will make:
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If BTC goes down to 14000 USD, a trader will get profit in the amount of:
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This loss will be repaid by the security deposit, and will be deposited back on a trader’s account:
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A buyer of the futures can sell it to any other trader before the contract performance date comes. With that contract terms stipulated in futures are not change, and the security deposit of a particular futures is transferred automatically to a new owner.
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A trader can only buy and withdraw bitcoin to its wallet with the help of cryptocurrency platform like EXMO. |
To make it all simpler, we will describe the principle of the futures-contract’ work in a simple bitcoin trade. Supposing, a sale of a single BTC at 15000 USD is stipulated; then, a buyer of the futures is 15 000 USD in debt to a seller in the moment of contract performance date; and a seller (emitent) of the futures turns to be in debt to a buyer with an amount that equals to a current Bitcoin market price in USD. Two debts are mutually repaid through virtual (“digital”) online-payments on the cryptocurrency platform. In other words, two debts are mutually repaid but partially, which is the repaid debt rest is automatically paid by one of the traders to another one from the amount of the security deposit.
It is important to understand that bitcoins are not actually transferred when trading with futures. Like a traditional application of futures-contracts on the universal, or stock exchanges, the stated type of contract does not provide real provisions and transfer of a product/asset. Any contract party cannot withdraw bitcoins from the traditional exchanges (such as CBOE, CME Group, TFX, and the others), which have been previously bought under the futures contract performance. In this case - BTC rate fluctuations will make the basics of the trade relationships. This also makes the major difference between the bitcoin futures, and complete bitcoin purchase.
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Other cryptocurrencies including Ethereum, Bitcoin Cash, Ripple, Litecoin, IOTA, Dash, Bitcoin Gold can only be purchased on cryptocurrency platforms. |
In fact, an investor needs to use cryptocurrency platforms such as EXMO to buy cryptos (in particular, bitcoin). A simple registration on EXMO platform is needed to manage operations with bitcoin. Besides, if you makes a decision to withdraw bitcoins to your wallet, you can only make it using crypto-platforms. The traditional exchanges offering bitcoin futures are good only for speculative operations. It is also important to mention that such contracts are usually made at the cost of 5 BTC, and more. By the way, cryptocurrency platforms are the only types of exchanges where users can buy cryptocurrency apart from bitcoin (DASH, ETH, and the others).
