What are futures?
Futures are an agreement to buy or sell an asset on a specific future date at a specific price. Once the futures contract has been entered, both parties have to buy and sell at the agreed-upon price; irrespective of what the actual market price is at the contract execution date. The goal is not necessarily profit maximization. It’s a risk management tool; often used in financial markets to hedge against the risk of changing prices of assets that are bought and sold on a regular basis. Futures are also used in portfolios to balance out price fluctuations on investments, where the underlying asset is particularly volatile. These contracts are negotiated and traded on a futures exchange which acts as the intermediary. Let’s have a look at Bitcoin futures.
What are Bitcoin futures?
With Bitcoin futures, the contract will be based on the price of Bitcoin and speculators can place a “bet” on what they believe the price of it will be in the future. In addition, it enables investors to speculate on the price of Bitcoin without actually having to own Bitcoin. It has two major consequences. First, while itself remains unregulated, Bitcoin futures can be traded on regulated exchanges. This is good news for those who are concerned about the risks related to the industry’s lack of regulation. Second, in areas where trading Bitcoin is banned, it allow investors to still speculate on the price of Bitcoin.
How do they work?
A Bitcoin future will work on exactly the same principles as futures on traditional financial assets. By anticipating whether the price of Bitcoin will go up or down, speculators will either go long or short on a Bitcoin futures contract.
For example, if an individual owns one BTC priced at $18,000 (hypothetically) and foresees that the price will drop in the future, to protect themselves, they can sell a Bitcoin futures contract at the current price, which is $18,000.
Close to the settlement date the price of BTC, along with the price of the Bitcoin futures contract, would have dropped. The investor now decides to buy back the Bitcoin futures.
If the contract trades for $16,000 close to the future settlement date, the investor has made $2,000 and therefore protected their investment by selling high and buying low.
This is a basic example of how Bitcoin futures work and the exact terms of each future contract may be more complex depending on the exchange, which will include minimum and maximum price limits.
Where can you trade Bitcoin futures?
Simply on Phemex! Phemex is a professional and trustworthy global cryptocurrency derivatives exchange. Phemex offers Bitcoin, Ethereum, Ripple, Litecoin, and EOS perpetual contracts, with up to 100x leverage.
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