Cryptocurrencies have come a long way, and they are here to stay. One of the most famous Cryptocurrency is Bitcoin, which has surprisingly withstood competition considering how it started as an experiment.
If you are not careful, this Cryptocurrency euphoria can sweep you up, but are you prepared to trade Bitcoin futures? If you are planning to start Bitcoin future trading, here is a guide that will help simplify things.
History of Bitcoin Futures
Futures trading is not a new thing in the market. With this kind of trading, participants place an order of buying or selling an asset in futures market rather than the equity or options market. Bitcoin futures started about a year ago.
The Mercantile Exchange (CME) group on December 16th 2017 launched the first digital currency future contract. Since then, it has encountered positive reception. This kind of trading allows traders to have access to standardized products without having to worry about hackers stealing their coins.
Trading Cryptocurrencies may land one into some legal problems. In fact at some point, the state and tax authorities associated cryptocurrencies with criminals. However, with the introduction of Bitcoin futures, traders can now have peace of mind.
What are Bitcoin Futures Contracts?
It is a pact that makes it possible for you to buy digital currency at a settled price, at a particular time in the future. They are similar to other future contracts, with two parties, in which one party will pay the other party a determined amount of money regarding a particular asset at a particular point in time.
With this Cryptocurrency, the traders can purchase or sell hence enabling them to trade on either side. If you have actual bitcoins, you can use the future agreement as an insurance against future losses (hedging).
The agreement does not allow you to purchase bitcoins physically. And should the contract expire, the CME group will calculate the difference between the closing amount and the Bitcoin Reference Rate to settle you.
However, you will not be given as cash. The settlement currency is in US dollars. Since the Bitcoin is more of a virtual asset, its future trading does not allow physical delivery. Bitcoin future trading increases by $5 per BTC and they follow the calendar months.
How to Trade Bitcoin Futures
Like earlier said traders could purchase (go long) or sell (go short) in regards to trading with Bitcoin futures. If you choose to go long on, the assumption is that prices will go up. And if you expect the prices of this Cryptocurrency to increase, you will then purchase contracts, which allow you to buy the currency at the set amount in the future.
An example, if the current Bitcoin sells at $4000 and you expect the amount to rise to around $7000 within five months from now, you will pay money that will allow you to buy the currency at $4000 in 5 months when everyone else will be buying at $7000.
If you decide to go short, on the other hand, you assume that this digital Cryptocurrency prices will fall. Therefore you buy the option with the hope that you will sell in the future at a higher price.
Take another example, if the current Bitcoin sells at $4000 and you expect that the amount falls to $1000 within five months, then you put options that will enable you to sell Bitcoin for $4000 in 5 months when everyone else is selling at $2000.
Whether you choose to purchase or sell, there is an expiration date in both as we have learnt in the above examples. If you are buying Bitcoin for $4000 on January 19th 2019 and the running time is five months, the expiry date will be June 19th 2019.
Things to Consider Before You Trade with Bitcoin Futures
1. Are Bitcoins available on your trading platform? Bitcoins are not available on all platforms. However, if they are on yours, ensure you understand the margin of the future contract.
2. The volatility. Although this currency is the highest traded Cryptocurrency, volatility also affects it. Bitcoin futures are associated with tremendous volatility. Therefore ensure that you understand the market.
Final Thoughts
Bitcoin Futures are a safe option especially if you are living in the United States. Why? You get to have access to standardized products without worrying about the legality of the trading.
Determining the future of Bitcoins Futures can be a bit challenging, but one sure thing is that their introduction will allow more conventional investment opportunities on cryptocurrencies.