What are Futures Contracts?
Futures contract is an agreement to buy or sell a certain commodity at a certain time for a certain price.
Once a futures contract has been entered into, both parties must buy and sell at the agreed-upon price, regardless of the actual market price on the contract's execution date. The goal of futures is not to make the most profit. It is a risk management tool, commonly used in financial markets to avoid changes in the prices of frequently traded products.
Futures contracts are also used in portfolios to balance investment price fluctuations, where these assets are volatile. These contracts are negotiated and traded on a futures exchange that acts as an intermediary.
At the time an agreement is made, the buyer and seller of the futures contract will know:
- What is the type of asset/commodity, also known as the underlying asset, that I will buy/sell;
- The volume and quality of assets that the seller will deliver and the buyer will receive;
- The time when the transaction of buying/selling the underlying asset will take place, or the time of contract settlement between the parties;
- The price that the buyer and seller will apply to pay for the purchase/sale of that underlying asset.
Futures contracts are derivatives that are listed and traded on a stock exchange.
How futures contracts work
Futures contracts have 2 options for users: long and short
When you choose to go long, you agree to buy an asset in the future at a specific price when contract expiration. When you choose to short, you agree to sell an asset in the future at the set price at the end of the contract. A good way to explain this is to use the example of an airline that wanted to combat rising fuel prices by entering into a futures contract.
For example jet fuel is trading at $2 per gallon. An airline that thinks oil prices will rise should buy a 3-month futures contract of 1,000 gallons at current prices. Therefore the contract will be worth $2,000 at the present time. If in three months when the contract expires, the price of a gallon of jet fuel is $3, the airline will save $1,000.
Suppliers will sign futures contracts to ensure a stable fuel market even at high prices. And the same contracts will also protect them if fuel prices suddenly drop. In this case, both parties are protecting themselves against fluctuations in fuel prices.
There are also investors who use the futures contract for speculation instead of using it as a hedge. They will deliberately follow a low-value commodity. As the price increases, the contract becomes more valuable and the investor may decide to trade the contract with another investor before expiration at a higher price to make a profit.
How Bitcoin Works
To put it simply, Bitcoin transaction It's not much different from the usual way of buying and selling. First, person A owns a certain amount of Bitcoin and wants to sell it, person B intends to buy it, then two parties will make a transaction, then, person A transfers Bitcoin to person B and person B will transfer person A's account an amount that corresponds to the amount and rate of Bitcoin at that time.
What are Bitcoin Futures (Bitcoin Futures)?
Futures contracts are not only for physical assets but also for financial assets. Bitcoin Futures are an agreement between a buyer and a seller to exchange Bitcoin at a certain time in the future. Before that, the two sides will have an agreement on the price and quantity to be exchanged.
It can have two major consequences:
- First, the price BTC volatile, uncontrollable, Bitcoin futures contracts can be traded on regulated exchanges. This is good news for those who want to avoid the risks associated with disobeying any of our legal laws btc
- Second, in areas where Bitcoin trading is prohibited, Bitcoin futures contracts still allow investors to speculate on the price of Bitcoin.
How to deploy Bitcoin futures contract
A Bitcoin Futures will operate on the same principles as the futures contracts of conventional financial assets. By predicting whether the Bitcoin price will rise or fall, speculators will choose to go long or short in Bitcoin futures.
For example, if an individual owns a Bitcoin priced at $18,000 and predicts that the price will drop in the future, to protect themselves, they can sell Bitcoin futures at the current price of $18,000.
As the settlement date approaches, the price of Bitcoin along with the price of Bitcoin futures will drop. The investor will now decide whether to buy back the Bitcoin futures contract or not.
If the contract traded for $16,000 close to a future settlement date, the investor would have made $2,000 and thus protected their investment by selling high and buying low.
This is a basic example of how Bitcoin futures work, the exact terms of each futures contract can be more complicated depending on the exchange between traders, including Minimum and maximum price limits.
Futures contract maturity and settlement
Quarterly futures contracts will be delivered/settled on the expiration date, i.e. at 15:00:00 (UTC) on the last Friday of each calendar quarter.
For example, the 0925 BTCUSD futures contract will expire on the last Friday of the respective three-month period, at 15:00:00 (UTC) on September 25, 2020.
Note: In the event of extreme market conditions, where the price index fluctuates sharply due to market manipulation or specific market conditions near the time of delivery and settlement, Binance will postpone the delivery and payment process respectively until further notice, which will be sent to all users.
Quarterly contract deposited in the above coin Binance according to the respective calendar cycle: March, June, September, December. For more information on contract specifications, tap this. After completing the delivery and payment process, a new quarterly contract will be created, and the K-line of the contract will change accordingly.
For example: When the 0925 quarter contract is delivered at 15:00 (Vietnam time) September 25, 2020, the system will create a new 0326 quarter contract (maturity date: March 26, 2021) . The K-line of the 1225 quarter contract will continue on the past K-line of the expired 0925 quarter contract, and the new 0326 quarterly contract K-line will continue on the K-line in the past of the original 1225 quarter contract.
Pay with the underlying asset (e.g. BTC, ETH)
The settlement price used for contract delivery will be calculated as the average of the price index per second over the past hour (14:00 to 15:00 EST) prior to maturity, i.e. the price index of a total of 3600.
The payment fee is calculated as fee taker for all positions settled on the delivery date.
- At maturity, the quarterly contract will be matured/settled. The system uses cash payment method for maturity/payment.
- Expired open positions will be closed according to the settlement price.
- You are only allowed to close the position and not open any new position 10 minutes before expiration/payment. i.e. Reduced Only Feature will be enabled.
- All unrecognized P/L will be calculated at maturity/payment and converted to recorded P/L (5~10 seconds pause), the delivery process will incur a payment fee, also is included in the recognized profit and loss*, so the payment fee should be deducted.
* Recorded PnL = position size * contract multiplier * (1 / entry price - 1 / settlement price) - position size * contract multiplier * settlement fee / settlement price
- The recognized P/L will be reflected on the account balance and the maturity/payment process is complete.
- Once the maturity/payment process is complete, the expired quarterly contract will be offline and the next new quarterly contract will be online (same symbol but different ticker). The price cap* will be applied to the new contract once the new contract is online and will be back to normal in 10 minutes：
*Max = price index * (1+10%); Min = price index * (1-10%).
Meaning of Futures with Bitcoin Price
It pushes the price of BTC up along with the overall profit of cryptocurrency also increases in the short term.
1 day after BTC futures were launched, on Chicago Board Options Exchange (CBOE), for the first time on a major exchange, the price of btc has increased by nearly 10%, reaching $16,936. Similarly, in the run-up to the launch of Bitcoin futures on one of the largest exchanges in the world – CME, the Bitcoin price surpassed a record $20,000.
The long-term impact of BTC futures is harder to predict but it will certainly continue to increase the price of BTC.
Does that mean that the price of BTC is almost on the rise?
There are quite a few reasons why this might happen:
- Since Bitcoin futures can be regulated on public exchanges, it gives formerly skeptics the risk of btc failing to comply with any regulatory requirements adding to the uncertainty. confidence to invest.
- Institutions are more likely to offer Bitcoin futures to their clients as a viable investment option.
- It brings more liquidity to the market, making it easier to buy, sell and trade cryptocurrencies, and therefore more profitable.
- It opens up a wider Bitcoin market for investors, including countries where Bitcoin trading has been banned.
- Since futures are designed to balance the price movements of the underlying assets, it can also make Bitcoin's price less volatile.
The meaning of futures contracts with the Blockchain industry
There are many possible outcomes. First, Bitcoin is considered a symbol of money encode. Therefore, as long as the price of BTC increases in a short time, regardless of whether it is due to the impact of the futures contract or not, it will attract the attention of the community. As more people pay attention to cryptocurrencies, the value of altcoin will also be pushed up.
The opposite case can also happen, investors want to sell altcoin exchange for Bitcoin to participate in its bull run. This may cause the price of Altcoins rapid decline. The more likely scenario is some strong Altcoin like Ethereum, Litecoin, Ripple, etc., could follow in the footsteps of Bitcoin when interest from investors becomes strong enough.
Exchanges that offer Bitcoin futures
There are two distinct markets where BTC futures are tradable:
- The first choice is on cryptocurrency exchanges including Bitmex and OKCoin. These exchanges have been providing this service for quite some time, and futures trading on these exchanges is still unregulated.
- The second option is on regulated public exchanges. This is a common phenomenon recently and is part of the reasons why the price of BTC increased in December of last year.
Of course, the Bitcoin futures contract will guarantee that the transaction is no longer affected by the price of this currency, but it also has certain risks.
Not everyone thinks that Bitcoin futures are born at this point, especially when the volatility of the cryptocurrency market is so great. The price consensus at this time will also mean that investors can suffer a large loss if Bitcoin continues to rise in price.