If you’ve been in the bitcoin space, you have probably heard people talking about futures trading. Sometimes it is brought up alongside traditional futures markets like the CME and how the launch of such products will affect the bitcoin market, and other times it may be brought up alongside exchanges like BitMEX and OKEX. So what exactly is futures? In terms of trading in the crypto space there is largely spot trading, futures trading and options trading. Spot trading is probably the simplest concept. A spot trade is the purchase or sale of a foreign currency, financial instrument or commodity for instant delivery[1]. If you bought grapefruit juice at the supermarket, exchanging your money for grapefruit, you are trading spots. Similarly if there was a grapefruit juice coin, let’s call it GFJ coin and you trade it on your favorite exchange, that is a spot trade on a spot exchange.
But let’s suppose that you are not satisfied with the grapefruit juice in the supermarket anymore and decide to make it by yourself! Being a diligent individual, you decide to buy fresh grapefruits directly from a grapefruit producer. Unfortunately, it wasn’t grapefruit season, just yet. So you tell the producer you will buy a few grapefruits at a certain price when they are in season. The grapefruit producers accept as they obtain certainty in sales. When the grapefruits finally come to season, and the transaction goes through, you are carrying out a futures trade. Futures contracts are an agreement to buy and sell a product at a fixed price at a certain time in the FUTURE! And that’s why futures trading is called futures.
So why do we need futures trading? We need it because the future is uncertain and certainty is valuable. Let’s go back to the example of the grapefruit. Your love for grapefruit eventually leads you to open a grapefruit juice cafe. You need to buy fresh grapefruits from the market every day. But what would you do if the price of grapefruit doubled? It’s probably good news for grapefruit producers, but for businesses that use grapefruit not so much. For the other way around, it’s good for the businesses and not so great for producers. If both consumers and producers participate in the futures market, producers and consumers can trade contracts on prices they believe are fair. This brings certainty to doing business and both consumer and producers gain.
Futures trading is not only crucial for running a business, but also has a number of features that spot markets don’t provide. For more information on futures trading follow us on twitter or medium.
