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What Is the Future of Bitcoin and How Does It Work?

What Are Bitcoin Futures And How Do They Work

With the popularization of cryptocurrency, cryptocurrency exchanges started using different interesting financial tools for trading, such as Bitcoin futures. This feature appeals to both experienced institutional traders and completely new investors. Let’s find out what it is and how to use it.

How Not to Pay Taxes on Bitcoin


What are Bitcoin futures?
Bitcoin Futures Types
What should you know about futures trading?
Bitcoin Futures Trading Benefits


What are Bitcoin futures?


What are Bitcoin futures?

At Crypto World, by “futures” we understand a contract in which the buyer agrees to buy and the seller agrees to sell an asset on a specific date in the future, at a price established at the time of opening. For example, Bitcoin futures means that BTC is the asset of a transaction and its price depends (although it may differ) on the value of the asset.

Three facts about futures:

  1. Available on most crypto exchanges.
  2. They allow you to maximize profits (and losses) from trading.
  3. You can trade cryptocurrencies without actually owning them.

Futures allow you to create complex trading strategies and are often used to hedge risk and maximize returns through leverage. Also, the different types of futures contracts have their own advantages and disadvantages and can be used for different purposes. Therefore, it is worth taking a closer look at the main types of futures.


Bitcoin Futures Types

Various platforms may offer different types of Bitcoin futures for trading. They can change in terms of opening and execution. There are 2 main criteria found on most exchanges:

1. Expiration date

It is usually divided into perpetual and quarterly. Quarterly futures are automatically closed on the last day of the quarter in which they were opened. A position in a perpetual contract can be held open as long as there are enough funds in the balance to pay the margin and funding fee. Until the perpetual futures contract closes, the trader receives unrealized profits or losses. When the position is closed, the unrealized profit/loss is converted to a realized one, which is posted to the trader’s account.

2. Delivery

It is generally divided into deliverable and settled. Future deliverables involve the physical transfer of an asset at a specific time. For example, to execute a deliverable BTC future, the seller must transfer the BTC and not just pay the price difference. Settled futures suggest paying the difference between the delivered price and the actual spot price. For example, if a trader opened a settled futures contract to sell BTC at $16,000, and at the time of execution BTC is $18,000, then he will pay the buyer the $2,000 price difference. Neither the buyer nor the seller deals with BTC itself.

Most cryptocurrency exchanges use these features for futures, but some may offer non-standard contracts, so don’t forget to check everything before opening a position.


What should you know about futures trading?

Since futures are derivatives, to work with them, you need to take into account several price indicators at once:

  • The price of the underlying asset. It is the value of the spot asset on which the contract price depends. For example, the price of BTC futures directly depends on the value of BTC. Exchanges generally calculate the price of the underlying asset based on data from one or more spot exchanges.
  • Futures price. It is the price of the contract when opening a position.
  • Base. It is the difference between the futures price and the underlying asset. The basis can be positive (when the spot price is higher than the futures price) or negative (when the spot price is lower than the futures price). For example, there is a future contract to buy BTC at $16,000 and then BTC rises to $18,000. In this case, we have a positive basis of $2,000.

All these factors complicate the calculation of the possible profit/loss, especially if the trader uses leverage, but the basis must be constantly monitored, since it determines the loss or profit that the trader will make after closing the position.


Bitcoin Futures Trading Benefits

Although a futures contract is a complex tool, it offers traders some advantages:

  • Trading with leverage. Some exchanges provide leverage of up to x100 and even more, which allows you to maximize the efficiency of the use of the deposit and improve the results of the transaction.
  • It is not necessary to buy a physical asset. Settled contracts can be traded without owning physical assets. That is, futures are available not only on cryptocurrency exchanges (but, for example, on CME) and can be traded even in those jurisdictions where cryptocurrencies are prohibited.
  • Coverage. A trader can hedge against volatility by opening a futures position against the main position in the spot market.

Example: we have BTC bought at $18,000 and we are worried that the price will go down. To hedge the risk, we open future deliverables to sell (short) BTC at $18,000. At the end of the quarter, we will sell BTC anyway and return the purchase price, and if the price rises before the execution time, we can simply close the position.

  • High liquidity. Since futures are derivatives, their number and trading volume are many times higher than spot ones. Futures are easier to sell or buy than a real asset, and price slippage on trades is less compared to spot.

However, futures are a complex and high-risk derivative instrument: before opening a position, you must calculate margin payments, take into account the funding rate, commission, and order type for the futures contract. Well, leverage significantly increases not only potential income, but also potential losses.


Conclution

Despite the high level of risk, futures trading on crypto exchanges is becoming more and more popular. Derivatives stimulate the increase in the prices of digital currency and contribute to its popularization. Of course, futures are more suitable for experienced traders, but if you like trading stocks, then you have to start somewhere. Think carefully about the pros and cons of cryptocurrency investments and decide if you are ready to join Crypto World.


Disclaimer: The information provided in this article is solely the opinion of the author and not investment advice; It is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instruction. Please do your own research and contact financial advisors before making any investment decisions.


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