Futures
Futures Key Points
- Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price.
- In the context of cryptocurrency, futures allow investors to speculate on the future price of a cryptocurrency such as Bitcoin or Ethereum.
- Futures can be used to hedge against price risk or for speculative purposes in the crypto market.
- Cryptocurrency futures are widely traded on various exchanges around the world.
- Unlike spot trading, futures trading can allow traders to profit from both rising and falling market trends.
Futures Definition
Futures are standardized financial contracts traded on an exchange, obligating one party to buy and another party to sell a particular quantity of an asset, such as a cryptocurrency, at a predetermined price and future delivery date.
What are Futures?
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price.
The asset transacted in the contract can be a physical commodity or a financial instrument, including cryptocurrencies like Bitcoin or Ethereum.
The predetermined price the parties agree to buy and sell the asset for is known as the forward price.
Futures contracts detail the quality and quantity of the underlying asset and are standardized to facilitate trading on a futures exchange.
Who uses Futures?
Futures are used by two main groups of market participants: hedgers and speculators.
Hedgers use futures to reduce the risk associated with the price of an asset, protecting themselves against potential price changes.
For example, Bitcoin miners may use futures to lock in a price for their mining rewards, protecting themselves from potential price drops.
Speculators, on the other hand, use futures to bet on the future price of an asset, aiming to profit from price changes.
When are Futures used?
Futures are used whenever investors want to manage risk or speculate on the price of an asset.
They can be used in any market conditions, whether prices are expected to rise, fall or remain stable.
In the crypto market, futures trading is available 24/7 due to the non-stop nature of cryptocurrency trading.
Where are Futures traded?
Futures are traded on exchanges that provide a marketplace for buyers and sellers.
In the cryptocurrency market, there are several global exchanges that offer futures trading, including Binance, BitMEX, and CME Group among others.
Why are Futures important?
Futures are important as they provide a way for investors to manage risk and speculate on price movements.
They also add liquidity to the market, making it easier for traders to enter and exit positions.
In the crypto market, futures can provide a way for investors to gain exposure to cryptocurrencies without actually owning them, which can be particularly useful for institutional investors.
How do Futures work?
Futures work by specifying a future date (the expiry date) and price (the strike price) for the transaction of an asset.
The buyer in the contract agrees to buy the asset at the specified future date for the strike price, while the seller agrees to sell the asset at the strike price on the future date.
Both parties are obligated to fulfill the terms of the contract, regardless of the market price of the asset at the expiry date.
Profits or losses are realized based on the difference between the strike price and the market price at the expiry date.