Ever thought of trading bitcoin but got discouraged by its high prices? Are you one of those investors who are skeptical of the unregulated nature of cryptocurrency? The good news is that you have to worry no more. Bitcoin Futures, which has been there for a while, enables you to trade on bitcoin without actually buying the underlying asset. That’s not all, these assets are available on the regulated Chicago Mercantile and the Chicago Board of Options exchanges.
That’s just the icing, let me serve you all you need to about Bitcoin futures.
What are Bitcoin Futures?
Bitcoin futures are contracts that specify the trade execution of bitcoin within a set time frame or price range in the future. The trade happens between an investor and an exchange company after they agree to terms governing the contract. One of these terms is that, when the agreed price is achieved or when the contract expires, the transaction will be automatically processed. In this process, participants do not need to own any Bitcoin but rather bet on its price movements.
An investor can short or long bitcoin futures. Longing means buying bitcoins at a low price and holding them for a specific period of time hoping that the price will rise during the said period. On the other hand, shorting refers to selling bitcoins in the hope that the prices drop within the contracted time.
Bitcoin futures are regulated by the Commodity Futures Trading Commission (CTFC). This adds more trust to the process of cryptocurrency trading.
Investors mainly use bitcoin futures to speculate the possible price movements in the coming days. For instance, if an investor believes that Bitcoin’s prices are about to nosedive, then he will short bitcoin futures and wait for the price to decrease.
How it Works
Let’s say Bitcoin is trading at $10,000, and an investor believes that this price is going to drop soon. The investor will only need to short a Bitcoin futures contract and wait. If the speculation is correct and the price drops, say to $6,000 at the time of expiration, the investor will walk away with the dropped margin of $4,000. However, when the contract expires, you automatically buy a similar amount of bitcoin at the current price.
The same principle applies in longing bitcoin futures contracts only that this time, we are speculating an increase in bitcoin prices. The increased margin will be your profit.
Additionally, the prices can go contrary to your speculation. Say, you short on bitcoin futures, but the prices take a u-turn and rises, you will incur losses similar to the increased margin. Therefore, just as in every trading process, there are risks of loss which have to be mitigated.
As earlier stated, bitcoin futures are regulated cryptocurrency assets and can be traded on reputable exchanges. The typical examples are the TD Ameritrade, Chicago Mercantile Exchange and Chicago Board Options Exchange, which was the first non-blockchain exchange to launch Bitcoin Futures. The introduction of physical bitcoin futures by Bakkt might earn bitcoin futures an entry into New York exchanges.
Therefore, you can easily trade bitcoin futures from any of these public platforms.
The second option is taking the bull by its horns and trading bitcoin futures directly from cryptocurrency platforms. Despite their unregulated nature, some reputable cryptocurrency platforms that offer world-class services out there.
Trading bitcoin futures, like all any other cryptocurrency trade, requires absolute vigilance and a working money management strategy to avoid incurring avoidable losses. Nevertheless, Bitcoin futures provide a more subtle alternative to trading cryptocurrencies.
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