What Are Bitcoin Futures?
Bitcoin futures are agreements to buy and sell Bitcoin at a fixed price on a specific future date. Because the crypto market can be volatile, Bitcoin futures appeal to traders looking to minimize risk and potentially boost profit.
Traders enter a futures contract on either a long or short position. Long positions agree to purchase the asset at a particular price on a particular date, while short positions agree to sell at that price on that date. Traders must buy or sell at the agreed-upon price on entering the contract, regardless of the price of the underlying asset at the future date. The price of Bitcoin futures closely tracks the price of the underlying asset––in this case, Bitcoin itself. Individuals can choose to trade their contract for a profit or loss before the fixed end date.
Benefits of Bitcoin Futures
In July 2018, the CMEGroup reported their Bitcoin futures volume growing 93% from Q1 to Q2, with a 58% increase in open interest. Investor interest is expanding as Bitcoin futures provide opportunities to short the market and hedge Bitcoin exposure.
Key benefits of Bitcoin futures include deep liquidity, greater leverage, and a wider investor base. Investors can now trade on Bitcoin’s value on large exchanges like CME and CBOE, with the security of regulation and transparency. Because of greater participation, trading can be more efficient, and liquidity will be maintained. Investors can hedge against potential losses by entering a futures contract at a fixed price. Bitcoin miners can also use futures to plan cash flow and hedge against market fluctuations.
Some potential difficulties with the rise of Bitcoin futures include a lack of a universally agreed-upon reference price and questions of trading and position limits.
Bitcoin futures could even possibly make the price of Bitcoin less volatile as price fluctuations balance. With greater liquidity and increase tradability, large buy or sell blocks will have less of an impact on the global Bitcoin price.