Futures Contract Key Points
- A futures contract is a legal agreement between two parties to buy or sell a specific asset at a predetermined price at a specific future date.
- In the context of blockchain and cryptocurrency, futures contracts allow traders to speculate on the future price of a cryptocurrency without needing to own the underlying asset.
- These contracts can be cash-settled or physically settled, meaning the underlying asset can either be exchanged for cash or physically delivered at the contract’s expiry.
- Futures contracts are commonly used as a risk management tool to hedge against potential price volatility.
- They are traded on regulated exchanges and are subject to oversight and regulation.
Futures Contract Definition
A futures contract is a standardized legal agreement between two parties to buy or sell a specific quantity and quality of an asset at a predetermined price on a set future date. In the realm of cryptocurrencies, a futures contract is an agreement to buy or sell a certain amount of a particular cryptocurrency at a predetermined price at a specific future date.
What is a Futures Contract?
A futures contract is a derivative financial instrument. This means its value is derived from an underlying asset – in the case of cryptocurrency futures, the underlying asset would be a specific cryptocurrency like Bitcoin or Ethereum. It stipulates that the buyer must purchase, and the seller must sell, the underlying asset at the set price, regardless of the market price at the contract’s expiration date.
Who Uses Futures Contracts?
Futures contracts are used by a wide range of individuals and institutions. This includes retail and institutional investors, traders, and corporations. Retail and institutional traders use futures for speculation, attempting to profit from price changes. Corporations use futures contracts to hedge against price fluctuations in essential commodities.
When are Futures Contracts Used?
Futures contracts are used whenever there’s a need to manage risk or speculate on price movements. They can be employed at any time but are particularly useful in volatile markets as they allow for price protection.
Where are Futures Contracts Traded?
Futures contracts are traded on futures exchanges. These are regulated marketplaces where futures contracts are bought and sold. In the crypto space, futures contracts are traded on various cryptocurrency exchanges, including Binance, BitMEX, and CME Group.
Why are Futures Contracts Important?
Futures contracts are important for providing market stability and efficiency. They allow participants to manage risk and speculate on price movements. In the crypto market, futures contracts are particularly important as they provide a way for investors to hedge against the notorious volatility of cryptocurrencies.
How Do Futures Contracts Work?
Futures contracts work by outlining the specific details of the underlying asset to be traded, the price at which it will be bought or sold, and the date of the transaction. Once the contract is entered, both parties are obligated to fulfill the terms of the contract by the specified date. In the context of cryptocurrency, this means the buyer is agreeing to buy, and the seller is agreeing to sell, a certain amount of a specific cryptocurrency at a predetermined price at a future date. The contract is settled either physically (actual delivery of the asset) or in cash (the difference between the price of the contract and the market price at settlement).
