As speculation of regulatory guidelines and institutional investment in cryptocurrencies continues to unfold, keeping up with all of the developments can be challenging.
However, Bitcoin futures have been available since the end of 2017, and they are increasingly available on regulated exchanges. They also may potentially impact regulatory decisions on further financial instruments for Bitcoin, such as ETFs.
For investors looking to speculate on the price of Bitcoin without having to actually own any directly, Bitcoin futures provide a viable, regulated means to do so effectively. Further, futures can help hedge against risk against the volatile price fluctuations of Bitcoin.
What Are Futures Contracts?
Financial futures are contracts that specify the buying or selling of an underlying asset at a predetermined price on a precise date in the future. Counterparties are obligated to fulfill the terms of the contract upon expiration, either buying or selling the asset at the price once the contract expires.
Parties can take two positions in a futures contract; long or short. Long means that the party agrees to buy the underlying asset in the future at a specific price, while short means the party agrees to sell the underlying asset at a specific price upon the contract’s expiration in the future.
Futures contracts are traded on regulated exchanges and are regulated by the Commodity Futures Trading Commission (CFTC). They are regularly used for two purposes:
- Speculating on the price movement of the underlying asset.
- Hedging risk.
In the first case, a party can purchase a futures contract on a commodity — such as oil — if they anticipate that the price of oil will rise leading up to the expiration date of the contract.
- For instance, if oil is $50 a barrel at the time of contract’s initiation and the buying party expects the price to rise before the expiration of the contract, they can profit off of the price difference — if the asset increases in price — through…