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se have been eventful months in the cryptocurrency market. Most cryptocurrencies, including Bitcoin (BTC), hit new highs before plummeting. This volatility is not unusual for the sector and there is also a very good opportunity in it.
While some crypto enthusiasts worry about Bitcoin’s unpredictability, others see the potential to wreak havoc. And it’s being done by Bitcoin Futures, a speculative BTC trading strategy that uses the volatility of cryptocurrencies.
So what are Bitcoin futures? How do they work, and more importantly, how do they affect BTC prices? If you have had any of these questions, you have come to the right place. This article will provide you with an in-depth understanding of Bitcoin futures, helping you chart the relationship between them and BTC prices. But before we dive into it, let’s first take a look at what futures are.
What are futures?
Also known as Futures Contracts, Futures are a legal agreement that forces the parties to trade a certain asset or security at a predetermined price and date in the future. This price, known as the forward price, is what the buyer pays when the contract expires, regardless of current market prices.
underlying asset is a commodity or other financial instrument. agreed date is known as the delivery date. And in addition, the seller undertakes to deliver the merchandise or the guarantee it offers. Likewise, the buyer guarantees the possession of the merchandise.
futures were intended to protect the trading parties from the risks of price and exchange rate fluctuations. y do this by setting prices before future transactions.
parties can take long or short positions. A long position holds onto a good, believing that you will appreciate it. On the other side of the coin, a short position involves selling the asset in the belief that it will depreciate. Futures are a common trading strategy in the stock market.
Evolution of Futures Contracts in Cryptos
Bitcoin futures are an evolving area in the cryptocurrency industry. First, they were born at the end of 2017. refore, the main futures trading platforms, the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME), offered them a regulated product.
Before that, exchanges offered futures as an unregulated commodity. Today the futures market has grown. You can trade the product on one of the many exchanges that offer them. Binance, Bybit, OKEx, and Deribit are some of the most popular.
How do Bitcoin futures work?
Bitcoin futures are a type of derivative that allows traders to speculate on the future. BTC price while managing risk. y have gained popularity as their introduction coincided with the explosion of cryptocurrencies like Bitcoin.
re is a lot of speculation about what these new tools mean for BTC prices in the long term. Can they help stabilize volatility or could they lead to even more dramatic swings? Here now, let’s look at its impact on BTC.
Like traditional futures, Bitcoin futures require a party to trade BTC at a predetermined price, date, and time. Also, they specify the amount of Bitcoins that the parties are trading with the contract size ranging from 50 to 20,000 BTC. refore, the volume available to trade varies with supply and demand, as well as market volatility.
Futures are speculative
se contracts work by specifying an agreed amount for the delivery of BTC between two parties. So if you have 100 BTC in BTC in “futures” at $ 15K each, your position would be worth $ 150K.
BTC futures provide a way to speculate on the rise or fall of BTC prices by buying and selling them. Thus, they allow you to ‘bet’ against the Bitcoin price movement without investing in it.
Futures increase selling pressure
purpose is simple: when you buy a contract at some point, you can, if your prediction turns out to be correct, buy Bitcoins at a price lower than their current market value and sell them higher for the life of the contract, just like you bet! !
When the Bitcoin futures contracts expire, the contract holder will win or lose and receive a cash payment. As a result, the bets of these holders can significantly affect the long-term performance of BTC because they increase the selling pressure. As a result, more people liquidate their positions towards the expiration date of the contract to collect profits or reduce losses.
BTC futures protect against risk
Investors use BTC futures because they allow buyers to hedge their risk before buying. refore, traders do not have to worry about losing money if prices go up or down. y will already be hedged against losses when they open their positions, thus providing some stability for both small and large investors.
When you buy Bitcoin futures, you are “taking” long positions. This is because he believes that BTC prices will increase within this time period; therefore, you can benefit. On the contrary, if you take a short position, you believe that Bitcoin prices will go down during this period of time. refore, you will benefit from falling prices.
How do BTC futures affect the price of Bitcoin?
All futures contracts acquire their value from their respective underlying. In the case of bitcoin futures, their prices are based on bitcoin spot prices, and any change in the latter affects the former. This dependency syncs the two mobile prices, even if there is a difference between the two.
So do futures affect BTC prices?
Shawn Dexter of Quantum Economics thinks so. According to him, derivatives allow investors to carry out risk-neutral transactions that they would not otherwise have access to. As a result, they have short-term and long-term impacts on the price of BTC.
It may appear that futures do not affect BTC spot prices because they do not involve the actual sale of BTC. However, Dexter thinks they influence them.
BTC Futures and Arbitrage
If someone were to buy a large volume of futures offered by an exchange, their BTC futures prices would go up. While this does not affect spot prices, it would provide an arbitrage opportunity, attracting traders eager to cash in on BTC’s lower spot prices. As a result, BTC spot prices would go up.
Long-term effects of futures on the spot price of BTC
Over a longer period, BTC futures significantly affect your spot price. This is because contracts increase price stability by reducing risk. When this happens, BTC turns bullish as it attracts investors on a large scale. And there is also greater liquidity from your investments. In short, futures attract institutional investors by allowing them to hedge their investments.
Final thoughts
impact futures contracts have on BTC prices remains questionable. One thing is clear, however; affect the demand of the cryptocurrency market. At this point, it can be rightly concluded that they affect BTC spot prices. In the long term, they infuse liquidity and thus stability in the BTC market. All of these futures results allow institutional investors to protect their holdings from risk. Although they are speculative, they offer the opportunity to make big profits when trading BTC.
Wayne is a Blockchain enthusiast and cryptocurrency trading expert. Currently, he deals with trending topics in digital currencies.
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