How Do Bitcoin Futures Work?

March 12th, 2018

What Are Bitcoin Futures?

Futures are not merely for physical assets, they can be used on financial assets as well. Bitcoin Futures contracts are based on the price of Bitcoin and speculations on the value of Bitcoin in the future. This allows investors to speculate the price of Bitcoin without having to buy it. There are two major reasons investors are excited about Bitcoin Futures. The first is that Bitcoin, a highly unregulated currency, will be able to be traded on regular exchanges. And also in areas or countries where Bitcoin trading banned, Futures allow for individuals to speculate the price of Bitcoin easily.

How Do They Work?

Bitcoin Futures work exactly on the same principles as other types of Futures for traditional financial assets. Speculators will either choose a short or long Bitcoin Futures contract based on the price of Bitcoin. For example, if an individual owns Bitcoin at $18,000 and predicts that the price will drop in the near future, they can protect themselves by selling a Bitcoin Futures contract at the same price. When the settlement date draws near and the Bitcoin price, along with the Bitcoin Futures get dropped, the investor now plans to buy Bitcoin futures. Now if the contract trades for $16,000 near the settlement date, the buyer makes $2,000 and enhances their investment by selling high and buying low. This is how Bitcoin Futures work and each future contract may be complex based on the exchange that will include maximum and minimum price limits.

What Does This Mean For The Blockchain?

There are a few possible outcomes that could arise from the use of regulated Bitcoin Futures:

  • Bitcoin is considered to be the “poster boy” for digital currency. If the price of Bitcoin increases in a short amount of time, regardless of whether it is due to Bitcoin Future, more individuals will notice.
  • As Bitcoin Futures becomes more popular, the demand for digital currencies will rise along with the price.
  • The opposite is possible too. If investors sell all their digital currencies for Bitcoin in order to take part in its run. There may also be large scale exits, which could cause a massive drop in the price of Bitcoin.
  • The most likely scenario, however, is that some other popular digital currency like Litecoin, Ripple, etc, may follow in the steps of Bitcoin and become tradeable as well, mainly because the interest from investors will double.

Where Can You Trade Bitcoin Futures?

There are separate markets where Bitcoin Futures can be traded. The first option is based off of the selected cryptocurrency exchange. Popular cryptocurrency exchanges around the world have been offering these option for a long time and the trade of Bitcoin Futures remains mostly unregulated. The second option is based on public regulated exchanges and is one of the reasons that value of Bitcoin has increased so dramatically.

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