Everyone talks a lot about the Futures and ETFs. When it comes to Bitcoin Futures as a financial instrument however are relatively new in crypto as compared to other established legal tender currencies. Let’s find out what are Bitcoin Futures and how they work.
What Are Bitcoin Futures?
Bitcoin Futures have become a relative phenomenon in the recent past. Since the paradigm shift in the cryptocurrencies for the last few months, the most talked about phrase is “Bitcoin Futures” and whether or not to invest in ‘Bitcoin Futures.’
To put it simply, Futures are Contracts to buy or sell an asset at a predetermined price on a specific date in the future. They are generally considered a risk management tool companies can hedge against risks associated with the price movements of resources including cryptocurrencies in general and Bitcoin in particular that affect their business.
For example a shipping company like Maersk can buy futures that bet on the price of oil being higher by a certain date. This means if they have to pay more for oil for their ships and their costs are impacted they don’t take as much of a hit. Since they have hedged it with their futures contract.
Now the way that this applies to crypto is similar. If you think the price of Bitcoin will be higher or lower over a period of time then you can speculate with the Bitcoin futures contract. The most popular companies like Bakkt and CME group or any other of the kind offer these contracts with Bitcoin Futures.
You don’t directly buy or sell any Bitcoin and you don’t hold it yourself and what happens is these futures trading platforms hold them in custody. Not just those companies there are also tons of small or large platforms that offer cash settled Bitcoin futures.
Benefits of Futures
There are many benefits of Futures in general. Most of the experts consider Futures a crucial financial institutional tool. As the popularity of such products provides more options to institutional investors and traders and further cements their role in mainstream markets.
Impact of Bitcoin Futures
Do Futures affect the price of Bitcoin? Well they can certainly affect sentiment around the future price and potentially affect orders, Therefore affecting the price. if ‘Futures Contracts’ are being settled in Bitcoin rather than Fiat currencies, this could also have an effect on the price.
Is it really the retail investor who’s interested in the Futures or is it more for institutions who really can’t deal with straight Bitcoin? Well certainly a lot of institutions like 401K Plans and and some IRAS need the product rather than Bitcoin itself but there’s certainly also a lot of retail interest in this. What everyone should be aware of though is that this is not Bitcoin it’s not the same thing and very likely the returns if passed is prologue are going to lag actual underlying Bitcoin by a quarter to a third. There’s a big tracking error in Futures based ETFs in commodities, cash settled futures based ETFs and everyone should expect that.