Futures contracts have a long history, the roots of which trace back to the 17th century… Japanese samurais. Today they play a key role in Bitcoin trading strategies.
Once, Japanese samurais, to secure the value of rice which they were paid with, introduced the idea of futures contracts. In short, a futures contract is an agreement obligating the trader to buy or sell assets at a specified time, quantity, and price.
In the world of cryptocurrencies, such contracts provide additional market liquidity and create opportunities for arbitrage. The volatility of Bitcoin’s value also reflects the volatility of different Bitcoin futures contracts.
Coinbase, one of the most popular cryptocurrency exchange platforms, announced on September 28, 2023. The intention to introduce regulated futures contracts on their advanced platform. Such contracts allow investors to benefit from the high volatility of most cryptocurrencies. Example? Suppose you want to secure the price of Bitcoin at $4,000, planning to purchase in a few months. Thanks to a futures contract, you can do that, regardless of later price fluctuations.
The evolution of the asset class takes various forms. As Nick Cowan, CEO of GSX Group, points out, “futures contracts are an important element of this evolution.” Why would someone trade Bitcoin futures instead of just buying a large amount of Bitcoin? The key is the ability not to physically possess those Bitcoins. Some crypto exchanges, like OKEx, offer lower fees for trading futures contracts.
When an investor enters into a futures contract, they can exit it in three ways: through offsetting, rollovers, or expiration. The most common is offsetting, which involves creating an equivalent futures contract. Another trading strategy associated with futures contracts is hedging, used to minimize risk, which is very useful due to the volatility of cryptocurrencies.
Nevertheless, Bitcoin futures contracts are speculative investments. Bitcoin, despite its decade of existence, has proven that its only constant is… price volatility. Trading Bitcoin futures contracts does not require physical possession of Bitcoins. It all comes down to trading Bitcoin in the future, at a previously agreed-upon date, regardless of the price at that time. It’s worth noting that Bitcoin futures contracts are settled in cash, meaning no actual exchange of Bitcoins takes place.
The world of futures contracts is not a simple game. These contracts can bring significant losses, as you might be forced to buy Bitcoins at a price much higher than the current one. Entering into a contract is a serious commitment that should be undertaken with great caution.
Photo by Jonathan Borba on Unsplash
