The general rule of thumb for traders in any market is simply to make profits on the assets they own as their value and price increases. This is the case for both traditional stock, and also crypto exchanges. What exactly is Bitcoin futures then?
To truly understand what futures contracts are and how futures trading happens, it is important to first explore derivatives.
A derivative is a financial instrument that helps investors make profits for an asset of which price fluctuations are common and frequent.
Derivatives vs Cryptocurrency
Derivatives trading is different from cryptocurrency trading. When trading a digital currency, we own it. For instance, when we buy Bitcoin, the currency we purchase goes straight into our digital wallets for us to store and manage.
Unlike Bitcoin or any other digital currencies currently on the market, investors cannot own a derivative; instead, they have to be bought in advance through futures contracts.
Investors can then choose to purchase futures contract (long position), believing that the prices of cryptocurrency will go up or buy a futures contract (short position) with the expectation that prices will go down.
Derivatives are used with financial instruments and assets such as gold, oil, commodities and recently cryptocurrency. Derivatives that are based on Bitcoin or Bitcoin Futures have been trading on the Chicago Mercantile Exchange Group’s (CME) electronic trading platform since 2017. It used to be available on CBOE but since there was no liquidity, it was pulled out of the market.
Meanwhile, some cryptocurrency exchanges such as Bitfinex also offered cryptocurrency derivatives for digital asset investors. Digital derivatives are not for those who use fiat currency.
Bkkt in the US market
Bakkt recently received a license for Bitcoin Futures trading for investors in the US. It is also likely that more cryptocurrency derivatives will be available.
The derivatives can be traded in either a bullish or bearish market; however, investors have to be aware of some of their qualities. For instance, derivatives have leverage in terms of returns. Even small investments can yield high returns ranging from ten folds to 100 despite high risks. In the same way, it is also possible to lose big on your futures contract.
Investors need to be more knowledgeable about investments before injecting money in derivatives. Trading in derivatives is like a zero-sum game in which one person’s gain is equivalent to another’s loss, so the net change in benefits is zero. Many investors find themselves losing way more than they expected from trading in futures and options, despite being veteran traders.
As the saying goes, buying derivatives is no different from having a nuclear bomb that can, in a few seconds, devastate towns and cities that took hundreds of years to build.
In the past, the global financial system collapsed because of derivatives. Investors are encouraged to study the assets they want to invest in before putting their money in them.
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