Bitcoin Futures Trading: How Does it Work?
5 min read
Ever since Bitcoin was created, which is about a decade ago, its price has been fluctuating and people have been buying and trading it. They buy at a price, and over time, hope that the prices rise enough so their investment is worth more.
While most Bitcoin and crypto investors will invest in the traditional manner of buying, holding and selling, there is now another way Bitcoin can be traded. Of course, we are talking about Bitcoin futures trading. However, this type of trading is a little more complicated and advanced than simple bitcoin trading. Why so? To find out, let’s take a closer look at how does bitcoin futures trading works.
With that in mind, this blog post is going to take a closer look at Bitcoin futures trading. We’re going to look at what it is, how it works and how you can do it. Of course, this article isn’t aimed at convincing you to trade futures, simply explaining to you how it works.
What is it?
Trading futures is essentially creating a contract or agreement to buy or sell a specific asset in the future at a fixed price that is decided on today. The actual market price of the asset on the future date of the trade doesn’t matter, as the price is dictated when the contract is created.
The ability to trade futures has been around for a while in traditional fiat markets, but trading futures in Bitcoin became possible fairly recently. Since then, many popular exchanges and platforms have begun to offer Bitcoin futures.
While many people who own Bitcoin will participate in futures trading, it is not required for some type of futures trading. Trading futures enable a possibility to speculate on the future price of Bitcoin, even if they don’t own any Bitcoin. In addition to speculation, trading bitcoin futures can also help investors hedge and manage their risk.
How Does It Work?
Now that you know a bit about what Bitcoin futures trading is, let’s find out how does it work? There are two different ways you can engage in a Bitcoin futures trade. You can either take one of two existing positions: a short one (an agreement to sell) or a long one (an agreement to buy). To understand things clearer, let’s discuss each of them more closely.
Short Position in a Nutshell
A short position, which is also known as “shorting” is when an investor agrees to sell Bitcoin at a fixed price at some point in the future. When shorting, you are betting that Bitcoin’s price will decrease in a certain period of time. Depending on the correctness of your expectations, you will receive a profit or lose money.
For example, if Bitcoin is at $19,000, but an investor feels it will drop. This investor will likely take a short position on a Bitcoin futures contract. If the price of Bitcoin at the ending date of the contract will be $8,000, this person will make $11,000 in profit.
So, what is the principle of it? In fact, the investor borrows a future contract from someone else. The second step is to sell it for the current value. The profit comes at the stage of buying it back cheaper in the future. The difference in price is an investor’s income. However, in case if the price of Bitcoin rose, you would have to buy it back for more, not only losing your initial investment but more as well.
This all ends up taking place behind the scenes at most exchanges, so don’t worry about having to go out there and locate your own future contracts to purchase.
So as you can see, futures can be risky but they still have the potential to be very profitable if you speculate correctly. Of course, on the other hand, they can also cost you a lot of money, so be careful. The exact terms, fees and other variables you might experience could differ depending on the platform you work with. So be sure to know all of the rules of Bitcoin futures trading before engaging in one.
Long Position in a Nutshell
We will start with an example. Let’s assume that the price of Bitcoin is $11,000 and you see it going higher. In this case, an investor will take a long position in a trading contact. It at the expected date the price of Bitcoin will be $16,000, you will receive $5,000 of profit. Nevertheless, in an unlucky case scenario (for example if the price will go down to $7,000), you will lose money.
Consequently, the so-called long position or “longing” is something an investor will choose if he or she expects the price to go up and agree to buy Bitcoin in the future at the current day prices.
A Guide to Entering Trading Bitcoin Futures?
So if you are interested in participating in trading Bitcoin futures, how do you get started? There are two different ways you can get around to trading Bitcoin futures. The first way is to trade futures on public exchanges like CBOE (Chicago Board Options Exchange) or CME (Chicago Mercantile Exchange).
These are regulated and can provide some additional peace of mind to investors who don’t want to work with exchanges. These have only recently begun to allow Bitcoin futures trading, but it is growing more popular. Don’t be shocked to see other brokerage firms to soon start offering crypto futures trading as well.
On the other hand, you can also trade Bitcoin futures on some of the top cryptocurrency trading platforms. All you need is an account and you will be well on your way. The trade of Bitcoin futures is unregulated here, so find out all you need to know about your chosen exchange before entering into any contracts.
In conclusion, hopefully, this article has been able to help you understand not only what futures trading is, but also how it works and how you can get started. Of course, before engaging in future trading, or even investing in crypto at all, it is vital to perform your own independent research and decide how much you are comfortable with putting at risk.
