A futures contract is a legal agreement to buy or sell an asset (or a representation of an asset) at a predetermined price at a specified date in the future, between different parties. In this case, the underlying asset is a cryptocurrency.
In crypto futures, the results of the contract will depend on the price of a specific cryptocurrency.
There are a lot of ways to utilize a futures contract. In the crypto space, the two most common driving forces for participating are speculation and hedging from volatility.
Hedging is more commonly practiced by institutional investors than by retail investors. It is a way to mitigate the risks of the volatile crypto market. Since cryptocurrencies are exchanged regularly all year round, investors can buy or sell at today’s prices in the future, and thus, avoid the repercussions of massive price fluctuations.
Investors who speculate bet that the price of a particular cryptocurrency will either go up or down at a specific time in the future.
Long and Short
Long and short refers to the “person” in a futures contract.
When an investor goes long, it means that they anticipate the price of the cryptocurrency to go up. For instance, if you long on Bitcoin, you can buy a Bitcoin futures contract at today’s prices, in a specific time in the future as agreed on the contract.
Shorting Bitcoin would be the opposite. You are the seller of the said contract as opposed to being the buyer, as you foresee the price to drop in the future.
As of today, Bitcoin might be the only crypto futures available on the market (very few exchanges offer altcoin futures), but regulators are ready to approve Ethereum futures, while they closely consider notable altcoin projects like Litecoin.
Futures may provide benefits to Bitcoin as well as positively (or negatively) affect its price. It allows a derivative of Bitcoin to be traded on regulated exchanges, consequently allowing institutional investors to enter the market, despite the fact that Bitcoin itself is unregulated.
In areas around the world where Bitcoin trading is banned, Bitcoin futures may be the loophole that allows investors to trade without risk of being pursued by regulators.
A high number of Bitcoin shorts may push its price downward, as it would cause traders to be anxious to buy or persuade them to sell.
Some Crypto Futures providers include BitMex, CME, PrimeXBT, etc.
This article appeared on BitPinas: Bitcoin Futures Contract 101 | Bitcoin Philippines Guide