Crypto futures is one of the most crucial financial derivative products available in the crypto market. They are used to hedge and speculate the future prices of digital assets. The bitcoin futures contract is one of the most traded crypto futures. Finance has gone through numerous innovations for centuries. These innovations have facilitated access to money and created intriguing ways of dealing with value. Currently in the markets we can witness numerous financial instruments being used for different functions. From derivatives that were the basis of the downfall of financial institutions in 2008 to futures and options. With the recent invention of cryptocurrencies, innovations have taken a new speed. The crypto industry has been quick to offer these financial instruments within their own package. Today we will go through crypto futures. Let’s dive right in! What are crypto futures? Crypto futures are a type of derivative in the form of a contract. Essentially, it is an agreement between two parties to buy or sell an asset at a predetermined price on a predetermined date. The price of this futures contract changes over the course of its lifetime as a result of daily trading activity. In the case of crypto futures, the underlying asset is a token or a coin (a digital asset backed by blockchain technology). Therefore, they essentially have an expiration date, a selling price (value determined by the market), and a future price. Use of Crypto Futures Crypto futures provide the opportunity to increase profits on a particular asset. At the same time, there is a risk of losing money on a bad bet. The core of its job is to enable people to speculate on the future value of an asset. For example, if you expect the price of Bitcoin to be $50,000 on February 1, 2022, you would buy a futures contract that says otherwise. So you deserve the difference. A real-life implementation of a future contract will be as such. First, you buy the contract to buy a digital asset at a price stated in the future. Let’s say your expectation is that the price will be higher on the future date, but the price quoted in the future contract is $30,000. Therefore, on the D-day, you could buy Bitcoin at $30,000 instead of the $50,000 market price. So you earn money. There are many such contracts. Of these, the Bitcoin futures contract is one of the most traded crypto futures contracts. It is traded on the Chicago Mercantile Exchange (CME). Pros and Cons of Crypto Futures Like everything else in this world, Crypto futures also have a good and a bad side. Let’s discuss the benefits first. First, it makes it possible to track the movement of crypto assets without having a digital wallet. Second, it is possible to hedge against the future. Third, it provides liquidity because these futures are easily tradable. Fourth, futures allow you to use a margin account. On the other hand, the drawbacks are as such. First, you cannot use futures as a medium of exchange, you will have to liquidate it. Second, the margin requirement for retail investments may be too large to serve. The debate about the pros and cons of crypto futures will continue. But in the meantime, there are many people who trade them on a daily basis. Go try your own luck!
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