Three Functions of Bitcoin Futures
1. Providing Hedging for Individual Investors
A hedge is an investment to reduce the risk of adverse price movements in an asset. While buying/selling a certain amount spot goods in the spot market, people can sell/buy futures contracts to avoid the risk of price movements of spot goods, compensating the losses in one market with the profits made in the other market.
Futures contracts allow individual investors to have more methods of making profits without trading in kind.
- Any increase or decline in price will bring potential profits to individual investors;
- Leverage makes it possible to invest with a small amount of money and get big rewards;
- For professional investors, futures contracts allow them to adopt a diversified strategy for trading.
For example, if investors hold some BTC, and want to reduce the risk of bitcoin price decline, they can enter into a short position of BTC futures contracts with the same value to the BTC bought. If the BTC price rises, the losses of the futures contracts can be made up by the profits coming from BTC appreciation. On the contrary, if the BTC price declines, investors can make profits from the futures contracts, which can recoup the losses of BTC depreciation.
Of course, investors can also enter into a long position of futures contracts if they plan to sell their spot goods for a certain period of time. They can close the long position when they decide to repurchase the spot goods.
2. Expanding Trading Methods for Institutional Investors
In the traditional financial market, the trading volume of derivatives based on some underlying assets is much higher than that of the physical transactions. Institutional investors, who have no advantages in the spot market, can enter into derivatives market to have a higher chance of making profits. Futures not only provide a hedging mechanism but also serve as a good way for institutional investors to enter the market and trade.
The supervision from different countries brings many legal restrictions on cryptocurrencies such as BTC etc., which makes it difficult for institutional investors to enter the market. However, the emergence of cryptocurrencies derivatives opens a new way for institutional investors to trade.
3. Increasing Assets Liquidity and Market Volume of Cryptocurrencies
As stated above, futures contracts attract many institutional investors to enter the cryptocurrency market, which increases the liquidity of various cryptocurrencies. Futures contracts enable diversified cryptocurrency trading strategies, which increases the total market volume with the mutual traffic diversion between the spot market and the derivatives market.
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