Bitcoin futures allow investors to participate in the Bitcoin (BTCUSD) market without owning the underlying cryptocurrency. They function similarly to a commodities or stock index futures contract in that they allow investors to speculate on the cryptocurrency’s future price. The Chicago Mercantile Exchange (CME) offers cash settlement monthly contracts.
What do bitcoin futures imply?
Expert+ Crypto Explainer A derivative trading product is a futures contract. These are regulated trading contracts in which two parties agree to buy or sell an underlying asset at a certain price on a specific date. The underlying asset in the case of bitcoin futures would be bitcoin.
What exactly are crypto futures?
Cryptocurrency futures are financial instruments that allow you to leverage your investments to increase your profits. They can be used to bet on a digital coin’s future direction or to hedge the future price risk associated with cryptocurrencies. Futures contracts are well-known financial instruments that are exchanged on an exchange. You’ll need an account with a futures broker who deals with a bitcoin futures market to trade them.
Is there a difference between bitcoin futures and bitcoin?
You don’t own bitcoin directly when you invest in a bitcoin futures ETF, as you would with a stock or bond ETF. Bitcoin futures, on the other hand, are what you own.
Futures contracts are essentially wagers between two investors on the price of an item be it wheat, oil, or bitcoin at a specific point in the future (hence the name). Bitcoin futures contracts, which are traded on the Chicago Mercantile Exchange, normally have a six-month expiration date. As a result, one group of contracts expires each month, and the exchange prepares a new batch that will expire several months later.
Naturally, the price of bitcoin futures contracts can increase above or fall below the current spot price for bitcoin, depending on whether investors believe the cryptocurrency will be worth more or less in six months than it is now. However, as the contract’s expiration date approaches, the price of the contracts should converge with the market price of bitcoin, until they finally coincide on the final day.
The bitcoin ETF operates by purchasing futures contracts with expiration dates within a month or two of the current bitcoin price, which should roughly, but not precisely, mirror the current bitcoin price. As the expiration date approaches, the ETF sells the contracts that are about to expire and buys a new set of contracts that will expire in a month or two effectively “rolling” them over.
This isn’t unusual; several commodity ETFs operate in this manner. The United States Oil Fund (USO), the most popular oil ETF, invests in crude oil futures rather than crude oil. These pricing differences normally don’t amount to much over short periods of time – think days or weeks. They can, however, become important over longer periods of time, such as six months or a year, according to Hougan.
How are Bitcoin futures profitable?
Most investors understand the importance of keeping as much of their coins in a cold wallet as feasible because blocking internet access to tokens greatly reduces the danger of hacking. Of course, the disadvantage is that this position may not arrive at the exchange in time, particularly if networks are busy.
As a result, when traders seek to reduce their position during volatile markets, futures contracts are the preferable vehicle. An investor can leverage their holdings by 10x by depositing a tiny margin, such as 5% of their holdings, and dramatically lower their net exposure.
After their transaction arrives, these traders could sell their positions on spot markets and close the short position at the same time. Those hoping to enhance their exposure with futures contracts should do the exact opposite. When the money (or stablecoins) arrived at the spot exchange, the derivatives position would be closed.
What is the price of a Bitcoin futures contract?
The value of a single BTC contract is five times that of the BRR Index, and it is quoted in US dollars per bitcoin. The tick increments are expressed in $5 increments per bitcoin, therefore a one-tick move in the BTC future is worth $25.
When Bitcoin futures expire, what will happen?
Speculators offset the vast majority of futures trades before final expiration. Some traders may choose to let their holdings expire, which, in the case of bitcoin futures, would result in a cash settlement based on the Bitcoin Reference Rate (BRR).
Bitcoin Price in 2011: $1 $30
In 2009, the price of Bitcoin was slightly above zero. About two years later, real Bitcoin adoption began, and a large Bitcoin price increase occurred for the first time.
For a few months in 2011, the Electronic Frontier Foundation (EFF) accepted Bitcoin for donations, but immediately reversed its decision due to the lack of a legal framework for virtual currencies.
BTC achieved $1.00 in February 2011, establishing parity with the US dollar for the first time. On the Mt. Gox platform, the price of BTC reached $10 months later, before quickly soaring to $30. Bitcoin’s price had climbed 100 times since the beginning of the year, when it was at $0.30.
Bitcoin’s price had dropped below $5 before the end of the year. No one knows for sure why the price acted the way it did, especially since the technology was so new. However, the trend of an 80%90% decline from record highs would continue to replicate itself in the future, even as considerably more Bitcoin liquidity became available.
What is the distinction between futures and spots?
A crucial factor in deciding the price of a futures contract is the spot price. It can reveal forecasts for future commodity price variations.
Spot Price vs. Future Price
The primary distinction between spot and futures prices is that spot prices are for immediate purchase and sale, but futures contracts postpone payment and delivery to predetermined future periods.
Typically, the spot price is lower than the futures price. Contango is the term for this circumstance. Contango is a regular occurrence for non-perishable items with high storage costs.
Backwardation, on the other hand, occurs when the spot price is higher than the futures price.
The futures price is expected to eventually converge with the current market price in either case.
More Resources
Thank you for taking the time to read CFI’s guide to spot prices and the differences between them and futures prices. Check out the following resources to learn more about capital markets and related topics: