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Bitcoin Futures Explained

Author: nicolas tang

bitcoin futures

Bitcoin futures have revolutionized the way Bitcoin is traded around the world. Basically, they are contracts where investors get a right to sell or buy Bitcoins at a predetermined market price in the future.

Understanding how Bitcoin futures works

In a Bitcoin futures contract, the investor is always guaranteed of the price at which he or she shall buy or sell his or her Bitcoins.
However, to clearly understand how BTC futures work, it is important to first understand what a Bitcoin futures contract entails. Below are some of the key components of a Bitcoin futures:

Contract size:

This indicates the size of each Bitcoin futures contract. The size here meaning the amount of dollars that a single contract is worth. This depends on the crypto derivatives exchange you are using. Some will have their contract size at $1, others at $5, etc. therefore; if you want to enter into a Bitcoin futures contract to sell Bitcoins worth $5000 and the contract size is $1. You will require to buy 5000 futures contracts.

Leverage:

This indicates the factor by which the exchange multiplies your invested amount so as to enable you to hold the trade for a longer time. It affects the profit or loss that you make from each trade. The higher the leverage, the higher the profit or loss. It is possible to open several Bitcoin futures on the same trading account with different leverages.

Expiration date:

This is the date at which the Bitcoin futures contract is automatically closed or settled. You can also sell out your contract and pocket your profits before the contract expires.

Settlement:

This is the form in which your profits or losses are calculated. Most exchanges offer cash settlements where the profits or losses are deposited or deducted from your account in terms of fiat currencies. However, there are some exchanges that offer physical settlements where the profits and losses are deposited or deducted respectively in form of Bitcoins.

Opening and closing positions in BTC futures contracts

In a nutshell, Bitcoin futures entail opening of an account with a crypto derivatives exchange that offers BTC futures, depositing funds in your account and buying Bitcoin futures contracts with the deposited funds. You can choose to open a short or a long BTC futures contract depending on your market prediction.

Short BTC futures contracts positions

This is similar to placing a short (also known as a sell) in the spot market. When a short Bitcoin futures contract is placed, your account balance rises as the Bitcoin prices fall. In short, you enter a contract to sell BTC at a predetermined price predicting that the sport market price of BTC will fall below that price in the future before your contract expires. Therefore you shall be selling the Bitcoins at a higher price than the market price and thus gaining profit.
If your market price prediction turn out to be wrong, and the prices rise instead of falling, then you shall end up making a loss.

Long BTC futures contract positions

This is similar to placing a long (also known as a buy) in the spot market. When a long Bitcoin futures contract is placed, your account balance rises as the BTC prices rise. In short, you enter a contract to buy Bitcoin at a predetermined price predicting that the sport market price of BTC will rise above that price in the future before your contract expires. Therefore you shall be buying Bitcoins at a lower price than the market price and thus gaining profit.
If your market price prediction turn out to be wrong, and the prices drops instead of rising, then you shall end up making a loss.

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