This Is How Bitcoin Futures Work

Bitcoin futures are a sensitive issue in the crypto industry: sometimes the futures contracts on the number one cryptocurrency are considered as a promise of salvation, at other times they succumb to the fate of damnation.

Remember that fateful December of 2017. CBOE and CME launched the products, and suddenly the Bitcoin heading towards the moon shot up. Suddenly, one unit of Satoshi Nakamoto’s cryptocurrency cost just under $20,000. But just as quickly it went downhill again a short time later: Within a month, the bears took to the market and keep him sometimes firmly in their paws.

It is not without reason that hedge fund manager Ray Dalio is considered the most successful investor in 2018. His fund achieved a performance of + 14.6% despite the difficult market conditions — with selected short positions.

There were many guilty accusations, including Bitcoin Futures. The futures contracts, which can be used to leverage the Bitcoin price, are still suspected of being the cause of the BTC’s price decline.

The origin of today’s futures goes back a long way and is in the futures of agriculture of the 17th century. The deal was as simple as it could be: farmers and their future buyers agreed on the price and quantity of a given commodity and secured it. The farmers could not only be sure of selling their goods. Rather, they could calculate with a specific price. On the other hand, buyers were able to hedge against a rise in prices — a win-win situation.

During the 19th century, the financial system adapted the futures business. Futures were used to conclude contracts, which from then on were termed futures contracts. Among other things, they formed credit insurance against banks and were thus fed into the stock exchange cycle. Today there are these futures for any tradable on the stock market. Orange juice, soy, oil — or Bitcoin.

Ultimately, a Bitcoin futures contract is an agreement between two parties that allows them to buy and sell Bitcoin at a fixed price and at some point in the future.

After the conclusion of the contract, both the buyer and the seller are obliged to conduct the transaction at the predetermined price agreed by them and without taking into account the current market prices.

If you enter into such a contract, you can go short or long. Those who go long assume that the Bitcoin price will rise in the long run. The opposite is true for the shorts. Here you start from a falling Bitcoin course.

It is thus rather the sellers who go long — they have an interest in selling the BTC at a higher price in the future. They set this in agreement with the buyers.

They say they are short-they bet that the Bitcoin price will go down in the future. From the agreed course they hope that they can “buy” Bitcoin cheaper than the price is actually.

If a bet does not run as planned, there is a kind of intermediate solution: the margin. So if the Bitcoin price is higher than expected and the seller is losing money, the exchanges offer the option of margin trading. As a result, the seller can still sell at a lower price — the counterparty, however, receives compensation, which was previously deposited as a margin at the respective stock or crypto exchange.

Author: Marko Vidrih

Image via isorepublic

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