Bitcoin Futures Explained

With Bitcoin being traded on the CME and CBOE futures exchanges and volume increasing, there are rosy predictions. Both daily and monthly contract volume has seen significant percentage increases. People want to buy bitcoins. This indicates that this cryptocurrency market is setting a foundation for future growth and stability as a viable market. Since futures can be a confusing subject, let’s find out what they are. After that, I think having bitcoin futures explained more specifically will be a big help.

The Bitcoin Futures Market Explained

First, A Look at Futures

Boiling it down, futures are contracts. These contracts are an agreement between involved parties to do something. That something is that they agree to buy or sell a particular asset. They agree to do this at a particular date and for a particular price.

The agreement locks them in and they must comply. When the futures contract comes due, when the execution date is reached, both parties must buy and sell at the price that they agreed upon. What the actual market price of the asset is at the time does not matter. The terms of the futures contract is what matters.

Portfolio Balance and Management

Risk is unavoidable when you are investing. Prices fluctuate due to market conditions. Some investments are more volatile than others. Volatility means the price could fluctuate wildly. Using futures can offset that volatility.

Related to that is the use of futures as a hedge in a portfolio. Instead of trying to maximize profit when entering a futures contract, your goal is to offset adverse price movements. This tactic is usually employed for assets that are bought and sold often.

The futures exchange is the middleman where futures contracts are bought and sold.

The Long and Short of It

When you hear long and short in trading that is simply terminology. It is trading lexicon.

If you “go long” or “take a long position” that simply means that you are going to buy at the agreed upon price on the agreed upon date. You’ll buy when the contract “expires”.

Short, as you have guessed, means that you will sell the asset at the set price on the set date when the contract expires.

Futures Speculation

Instead of using futures contracts to protect their investments, some investors invest in futures contracts. To them, they are might take a long position because they are predicting that the asset will increase in price. The opposite is true also.

They might also actively trade the contracts themselves if they believe the market has changed and trading the contract is to their advantage.

How Does This Work With Bitcoin?

With Bitcoin futures trading, it is all about price. The traders are simply betting on price. Specifically, they are betting on what they think the price will be in the future. They can do this without having to actually own any bitcoin. It is all contracts.

Why Does Anyone Do This?

With Bitcoin Futures trading, profit appears to be the driving force. The traders want to make money. Can’t fault them for that, eh?

Some investors would never invest in Bitcoins. Bitcoins are unregulated. Lack of regulation means risk. That scares many away.

However, the futures exchanges for Bitcoin are regulated. The CME and CBOE are bastions of stability and security. They are both regulated. This means that if a lack of regulation is too risky for you but the cryptocurrency Bitcoins appeal to you as an investment, you have an option. You can trade futures and enjoy the safety and security of regulation.

Another appeal of regulated futures exchanges is access. You can’t trade Bitcoins everywhere. In some places, bitcoin trading is banned. But in those same places, speculating on the price of Bitcoins in a regulated futures market is not.

As you can see, opportunity abounds for those wanting to take the plunge into cryptocurrency price speculation.

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