What are Bitcoin futures?
Bitcoin futures are futures contracts that speculate on the price of Bitcoin without participants actually having to own Bitcoin. Futures trading platforms like Binance futures trading offer physical delivery of the underlying asset for contracts.
Entities that participate in Bitcoin futures are essentially making a bet on the price of Bitcoin over a specified period. Bitcoin futures work the same way as any futures contract on a traditional financial asset. Investors can either go long on Bitcoin — expecting the price to increase — or short it, mitigating potential losses if they actually own some Bitcoin.
For instance, if James owns 1 Bitcoin at $10,000 and expects the price of Bitcoin to drop, he can sell (short) a futures contract at the current price of $10,000
If the price drops to $9,000 near the expiration of the contract, then he can buy (long) back the futures.
Bitcoin futures provide several advantages for investors.
- First, they are traded on regulated exchanges, making the process much more familiar and comfortable for mainstream and institutional investors who may not want to deal directly with cryptocurrency exchanges.
- Second, the contracts allow for speculation on the underlying price of the asset without having to go through the process of properly storing bitcoins, which is a high barrier to entry for many people unfamiliar with how Bitcoin works.
- Third, by granting Bitcoin more exposure to investors, more liquidity is added to the market. Finally, futures trading can lead to less volatility of Bitcoin’s price in the long-term and enable investors to protect themselves from adverse price swings.
Institutions are also more likely to offer Bitcoin futures trading to their clients since it is within a regulated exchange and reduces the risks associated with holding bitcoins.