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Investments & Earnings / Криптовалюты / Статьи о криптовалютах

Криптовалюты / Статьи о криптовалютах 19-02-2019 5 592 0

Is It Worth Buying Bitcoin in 2019?What are Bitcoin futures and how do futures work

A Bitcoin futures contract within the US regulatory field is a bid for the full recognition of cryptocurrency around the world. But what exactly are Bitcoin futures, how do they work, how promising are cryptocurrency futures, what is their appeal and their drawbacks, how great is the risk?

Futures trading is common practice in the cryptocurrency space. Cryptocurrency futures are a way to trade future price action on cryptocurrency assets. Bitcoin futures are the most common cryptocurrency futures, having appeared a little over a year ago. In December 2017, the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE) listed cash-settled Bitcoin futures. Cash-settled means that these futures are not backed by Bitcoin. When the futures contracts expire, their value is paid out in cash, not in bitcoins.

The online broker Trade Station explains futures contracts in the most accessible language – it is "an agreement to make or take delivery of a commodity or financial instrument in the future." That is, when buying cryptocurrency, you can only get what is available in the order book and only what you have paid for in full. In the case of a futures contract, you can not only buy but also borrow even something that does not yet exist. The easiest way to demonstrate this is with the example of oil futures: 90% of them do not end in physical delivery. Traders earn with leverage on the change in the value of the underlying asset upward or downward, while suppliers (in the case where the commodity is delivered) hedge against a price collapse in the period before the contract's expiration. By analogy with oil, a Bitcoin futures contract is a so-called cash-settled asset, from a change in whose rate the buyer can profit. No one receives Bitcoin itself in this case.

Each futures contract contains a certain amount of the product being traded. In the case of CBOE Bitcoin futures, each futures contract contains 1 bitcoin, and its value is calculated based on the price of the Gemini cryptocurrency exchange auction.

Futures contracts (in this case, on Bitcoin) can be bought or sold by a trader at any time – as supply and demand regulate the price of the contract and the value of its underlying asset (Bitcoin).

Thus, futures allow you to earn on the risks and opportunities of Bitcoin without buying the underlying asset.

How does futures trading work?

On the CME or CBOE, traders can make or lose money by speculating on the price of Bitcoin without buying it. A significant part of futures trading consists of their endless buying and selling between the opening of the contract and its expiration. Trading Bitcoin futures involves constant adaptation to changing market conditions.

For example, a trader decided to trade Bitcoin futures several times with a validity period from November 1 to December 1. Essentially, this trader could buy a position at any time between these dates and then sell at any time before December 1, making a profit or a loss.

A specific example of a trade would look like this: on November 8, a trader bought a Bitcoin futures contract for $3,100, and then sold it two days later for $3,200, making a profit of $100, which is paid out in cash. If the price had not risen to 3,200 but fallen to 2,900, the trader would have incurred a loss of $200.

A trader also has the opportunity to sell Bitcoin futures when they fall in price, borrowing a Bitcoin futures contract from a broker at one price, betting that it will decline in the future, and buying back this contract at a second, lower price. The difference between these prices forms the trader's profit. The exchange looks for contracts to borrow, meaning traders do not need to look for them from brokers.

For example, if on November 3 the spot price of Bitcoin is $3,000, and the trader believes that by November 18 it will fall to $2,000, he sells a short Bitcoin futures contract, using the functions of the CME or CBOE. If on November 3 the trader sold one futures contract at 3,000, and on November 18 its price fell to 2,000, he will buy back the contract and receive a cash payment of $4,000 (his original 3,000 + 1,000 profit).

In this same example, if the trader opened his position at $3,000, he can close it at any time before the contract expires. Thus, if the contract was sold on November 3 for 3,000, and by the 8th its value fell to $1,500, the trader can immediately buy it back and make a profit of $1,500, rather than 1,000, as planned earlier. On the other hand, if the spot price of Bitcoin rose to 4,500, and the trader decided to stop trading, he will terminate the contract and incur a loss of $1,500.

What is expiration and settlement?

The contract term is the expiration date of the futures contract and the cessation of trading activity. "Before expiration, traders have several options for closing or extending their positions without holding the trade until expiration, but some traders prefer to hold the contract and proceed to settlement," CME Group explains on its website.

Settlement under the contract takes place on the specified date. CME Group explains settlement as "the fulfillment of legal delivery obligations associated with the original contract." Consequently, on the specified date the amount of the underlying asset will be transferred to the contract holder at the market price.

Since CME and CBOE Bitcoin futures are cash-settled, the contract holder will receive the specified value of the contract in US dollars.

Do futures affect the price of Bitcoin?

Futures on global stock exchanges, such as NASDAQ, have an impact on markets as well. Therefore, it is widely believed that CME and CBOE Bitcoin futures also affect the price of Bitcoin. Sometimes this is indeed the case. Sometimes the movement in the Bitcoin price preceded the futures settlement period. For example, on June 29, 2018, the value of the cryptocurrency reacted to the approaching six-month settlement.

Therefore, despite the fact that this may be just a coincidence, it can still be assumed that the future settlements of the CME and CBOE do affect the price of Bitcoin.

BitMEX Bitcoin and altcoin futures

Unlike CBOE and CME, BitMEX futures are settled in cryptocurrencies, which means that the underlying asset itself is delivered at settlement. Not long ago, BitMEX announced the addition of new crypto futures paired with bitcoin. In December 2018, futures contracts were concluded for the following altcoins: ADA (Cardano), BCH, EOS (EOS), ETH (Ethereum), LTC (Litecoin), TRX (Tron) and XRP (Ripple).

Since these contracts are tied to Bitcoin, their value is assessed in terms of their value in Bitcoins. The contract sizes are one unit of the underlying asset (1 ADA, 1 EOS). For example, one EOS token will equal approximately 0.000685 Bitcoin. These contracts speculate on the value in bitcoins that the aforementioned assets will have during the quarterly expiration period.

BitMEX perpetual Bitcoin futures

BitMEX is known for its perpetual contracts. Each contract equals $1 US and has no settlement date or expiration. With these perpetual contracts, traders can trade and open positions as many times as they see fit, without marking an expiration date, as is the case with the CME and CBOE.

However, these perpetual contracts have what is called funding, which occurs every eight hours and can affect profit or loss. "You will only receive funding if you hold a position during one of these periods," the BitMEX website states. Simply put, funding consists of an interest rate and a premium or discount. "This rate keeps the price of the perpetual contract at the level of the underlying reference price. Thus, the contract imitates the operation of margin trading markets, since buyers and sellers of the contract periodically exchange interest payments," the exchange explains.

Bitcoin futures and crypto trading: pros and cons

Pros:

- the ability to bet against the market – futures work both ways. Consequently, you can short against your favorite cryptocurrencies.

- trading using borrowed funds: futures allow you to expand your capital. This is another advantage for cryptocurrency exchanges, because storing cryptocurrency assets in exchange accounts always involves risk.

- hedging. Futures trading is an excellent method for hedging any portfolio. Instead of selling your Bitcoin, you can buy a few short futures to hedge your portfolio during a bear market.

Cons:

- high risk. Futures are considered the riskiest trading instruments.

- an unexpected squeeze. A sudden squeeze of short and long positions can turn them into a bloody wound.

- high volatility. On the one hand, volatility is a paradise for traders; on the other, it makes it difficult to determine market sentiment.

- commission. Borrowing money is always expensive, and the fee for it can turn out to be very high.

Is It Worth Buying Bitcoin in 2019?What are Bitcoin futures and how do futures work