Chapter 18: What are Futures, More Precisely?
In this chapter, we’ll explore a concept that you may or may not be familiar with. If it’s the latter, don’t be afraid to admit that there’s still more to learn. Our Crypto Fundamentals series is aimed at crypto beginners and our goal is to help you find your way in the exciting world of cryptocurrencies. Read on to find out more about futures.
What are they?
Futures are financial derivative contracts that, once settled, compel the parties to sell an asset at a future date and at a predetermined price. That asset can be bought or sold at the set price regardless of the market’s current price at the expiry date.
The assets in question may vary from commodities and equity to cryptocurrencies and other financial instruments. Futures contracts detail the amount of the underlying asset, and they’re standardized to facilitate trading on a futures account — which is different from the regular version used for spot trading.
Usually, futures are used for various speculations where investors bet on an asset’s future price. The trader bets on the chart’s next move (wherever it’s up or down). Before taking the trade, information about the transaction’s expiry date and general price levels are given. For example, a May-futures contract will expire in May.
How do futures work?
There are two positions when transacting futures contracts, depending on how one bets on an asset’s price: long or short. These two refer to multiple things and strategies in various financial contexts, but it’s about price in the futures context.
A futures contract allows traders to speculate on an asset’s next directional move. There’s profit if somebody has bought a futures contract and the asset’s price has grown and traded above the long position’s entry price.
Before expiry, the long position would be compensated with a sell position of the same amount at the market’s price, thus closing the long position. Instead, if someone bets on an asset’s downfall, that’s a short-sell position. Such trades should be made only after a proper technical analysis of the asset.
What are Bitcoin futures?
Bitcoin futures allow traders to obtain exposure to Bitcoin’s price volatility without owning the actual coins. While futures contracts still possess significant risks, they offer a more regulated and stable environment for Bitcoin exposure rather than spot coins.
In addition, futures can protect a trader’s portfolio against volatility and negative chart moves using short-sell positions that generate profit when the price goes down. Bitcoin futures serve multiple purposes to multiple investors. For Bitcoin miners, futures represent blocking prices that ensure a return on investment, regardless of what’s coming next.
Among the benefits of futures trading is that they’re traded on the market regulated by the Commodity Futures Trading Commission, thus offering institutional investors many safety measures and trust to take such positions.
Can futures influence underlying asset prices?
Institutional investors can influence asset prices and market moves depending on how much money goes to the long/short position. Because these institutions have more money than retail investors, they can cause more considerable effects over actual asset prices, especially if multiple institutions do the same thing simultaneously.
Speculative and mutual funds are examples of institutional investors that can have diverse partners. When these funds adopt buy exposure via long positions, they can lead to asset prices higher than their actual value.
In contrast, when exposed to short positions, these funds can send the price of an asset way lower than its real value. Retail investors can accomplish more minor results, depending on the market’s general sentiment.
What’s Bitcoin for the crypto industry?
The price of Bitcoin and its volatility influences other cryptocurrencies known as Altcoins. Wherever these coins tap from Bitcoin, exist on the same network, or another one, their market moves tend to copy Bitcoin’s direction.
Of course, this may change over time, and Altcoins will enjoy their volatility based on their fundamentals, but the basic framework remains similar. Both Bitcoin and Altcoins share code lines and work in Peer-to-Peer networks, like a giant computer, capable of processing substantial data loads and transactions at the same time using Blockchain Technology.
Because Bitcoin is the most popular cryptocurrency, it has a superior influence in the market over any other cryptocurrency. In conclusion, if Bitcoin’s price suffers, the whole crypto market will do the same.
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