Understanding the Use and Impact of Bitcoin Futures

For a while, cryptocurrency investments have been limited to three methods: purchasing, trading and mining. Yet, those who are considering investing in bitcoin have another method worth taking into consideration – bitcoin futures.

In this article, we will attempt to shed more light onto the futures market, by discussing what futures contracts are, how they work, their profitability, and whether futures can impact the bitcoin price.

So, what are futures?

Futures can be described as an agreement between two parties, where the first party agrees to purchase or sell an asset, at a specific price, and on a specific date in the future. By entering the contract, the two parties will have to buy/sell the asset at the price that has been agreed upon, without taking the current and future market price into consideration.

Futures are both an investment tool suited for increasing profits, but also a risk management tool, that investors use to protect themselves from price volatility. Futures contracts are generally traded and negotiated by using a futures exchange. In the case of bitcoin, the CME Group is currently the most widely-used exchange for bitcoin futures.

There are two possible decisions that you can make when signing a futures contract. You either agree to buy the specific asset at a pre-set price once the contract expires, or you agree to sell the assets at the pre-set price once the contract expires.

Understanding bitcoin futures

In the case of bitcoin, the futures contract is directly linked to the price of bitcoin. Investors can thus speculate, and invest their money based on whether they think the price will increase, or drop. It is important to point out the fact that by leveraging bitcoin futures, you don’t actually have to purchase any bitcoin; therefore any volatility won’t work in your benefit or disadvantage. The futures exchange handles this part of the deal.

Bitcoin futures are no different when compared to traditional futures contracts. As such, investors can simply choose whether to long or short the contract in question, to protect themselves against negative volatility, or gain extra profit in case their assessment was correct.

The main benefit of bitcoin futures, is allowing regulatory-warry investors to join the cryptocurrency market. The futures market is widely-regulated, thus granting investors an extra safety net when entering such contracts.

Futures impact on the bitcoin price

Determining the impact of any event, or investment tool is difficult, especially in the case of cryptocurrencies. So far, analysis has shown that increased interest in bitcoin drives up prices, whereas negative events and lower trading volumes have the opposite effect. From a short-term perspective, bitcoin futures do positively impact the coin’s price, thanks to the extra investor interest. This conclusion arises after analysts have witnessed the bitcoin price uptrend, following the launch of the Chicago Board Options Exchange, and the CME Group’s futures contracts.