One of the more misunderstood concepts introduced within the cryptocurrency world recently has been the futures market. While many people are aware that Bitcoin futures markets now exist, they remain unclear about what that really means, In this article, we’ll introduce to you what futures markets are, how they interact with Bitcoin, and what impact they may have upon the price of Bitcoin as well as the entire cryptocurrency market.
What Are Futures?
Thousands of futures markets exist within the financial world. Indeed, just about every stock, commodity, currency, or other tradable asset has an existing futures market associated with them. It was only a matter of time before major derivative companies sought to add Bitcoin to that list as well.
Trading futures is when two parties agree that that one of them will buy a specific asset (in this case Bitcoin) and the other will sell it for a set price, on a set date and time. Some key terms to be aware of when looking into futures markets are:
- Underlying – The underlying is the asset that is being traded. In a Bitcoin futures market, Bitcoin would be the underlying.
- Settlement or Maturity Date – The date on which the futures contract will be filled.
- Futures Price – The price at which the contract will be filled.
To put it simply, futures marketers are essentially betting on whether the price of a specific asset (Bitcoin) will go up or down by the date in question. For example, if Bitcoin is at $9000 on January 1st, and you believe that the price of Bitcoin will go up to $10,000 by April 1st, you would set up a futures contract for Bitcoin with the maturity date of April first, and the futures price of $10,000.
If at any point prior to April 1st, the price of Bitcoin went above $10,000, you could sell the contract at the price at that time. For example, if Bitcoin went to $10,100 on March 1st, you could sell the contract and make $100 for each Bitcoin that you had a contract for.
You Don’t Actually Own Bitcoin
What makes futures trading particularly interesting is that, while you are making a futures contract based on the price of Bitcoin, you don’t actually buy or sell Bitcoin at any point in the process. You’re simply ‘betting’ on what you believe the price will be. This is an extremely important point when it comes to looking at how futures trading impacts the price of Bitcoin.
Impact on Bitcoin
Since nobody actually buys or sells Bitcoin when trading futures, it’s counterintuitive to believe that the futures market has any bearing upon cryptocurrency prices at all. The fact is, however, that it does. Moreover, many investors who trade and invest in futures are ‘whales’ with a significant amount of assets at their disposal.
How so? A futures trader might set up a futures contract saying that Bitcoin will drop in price within three months, and then deploy their assets in such a way that it pushes market prices lower as the maturity date approaches. While this can take a significant amount of money and includes substantial risks, the payoff is tremendous. Unfortunately, such market manipulation is sure to increase as the Bitcoin futures market grows. And for all other investors seeking to discern where market prices are headed, such price manipulation remains a significant concern.
Many crypto investors believe that a futures market for Bitcoin will eventually help stabilize it’s price fluctuations. While futures traders desire some price volatility, the unpredictable swings found in crypto markets can prove somewhat dangerous. How might bringing in serious futures traders stabilize the price of Bitcoin? Because such traders can buy and sell in sufficient volume to minimize the excessive volatility found within the crypto world.
Potential Influx of Investors
Finally, futures trading for Bitcoin could lead to a huge influx of money into cryptocurrency. When investors begin seeing Bitcoin (and possibly other cryptocurrencies) on futures contracts, they may take a closer look at the whole crypto-economy. This may inspire them to begin investing directly in Bitcoin and other currencies rather than only buying the futures contracts.
While it is impossible to predict how the Bitcoin futures markets will evolve, it is almost certain that immense changes are set to occur. Futures trading is a massive market and will be used by millions to make (and lose) money for years to come.