Bitcoin futures are a useful tool for managing the volatility of bitcoin prices. Here’s how bitcoin futures work and how you can use them.
What’s a Futures Contract?
To understand what bitcoin futures are, you have to understand the basics of futures contracts.
In finance, a futures contract is an agreement between two parties to buy or sell an asset on a specific date. The parties sell at a price that they agree upon ahead of time. Even if the market price of the asset turns out to be different on the agreed-upon sale date than the price that was set in the futures contract, the price specified in the contract remains in effect.
The party that agrees to buy the asset specified in a futures contract is said to be taking a “long” position. The seller takes the “short” position.
Futures contracts can be used for any type of asset, including bitcoin.
Why Use Bitcoin Futures?
The main benefit of a bitcoin futures contract is that you can buy and sell bitcoin at a fixed price, regardless of fluctuations in bitcoin’s value. That is a significant advantage given the current state of the bitcoin market. Bitcoin prices routinely rise and fall by around ten percent in a single day. During market crashes, bitcoin price drops of thirty to forty percent are not uncommon.
The high volatility of bitcoin prices means that it can be challenging to sell bitcoin profitably at any given moment.
If you own bitcoin and know that you will need to sell your bitcoin at a certain price, a futures contract will ensure you can accomplish this goal—regardless of what the market value of bitcoin happens to be on the day you choose to sell.
Similarly, if you want to buy bitcoin on a fixed date without worrying that market volatility will force you to pay an inflated price, a bitcoin futures contract will provide you with a set price.
Other Bitcoin Futures Contracts Advantages
Bitcoin futures contracts offer other advantages as well. One is that investors can generally participate in them, even in areas where buying and selling bitcoin itself is banned.
Another is that bitcoin futures can be traded on regulated futures exchanges. This could potentially provide an avenue for bitcoin investors to buy and sell bitcoin in a way that meets regulatory requirements, even though bitcoin itself is unregulated and can pose potential compliance issues for investors in some jurisdictions.
Tips for Bitcoin Futures Contracts
In order to use bitcoin futures contracts effectively, keep in mind that:
- Trading on futures exchanges typically involves fees and commissions. Factor these into your bitcoin futures investing strategy.
- Although a bitcoin futures contract guarantees that you can buy or sell bitcoin at a fixed price on a particular day, it does nothing to ensure that your bitcoin will hold its value once you have purchased it through a futures contract.
- Futures exchanges typically place limits on the size of trades. Depending on how much bitcoin you own or buy, and which exchange you use, you may not be able to meet all of your trading goals in a single futures contract.