With the launch of Bitcoin Futures on December 11 last year, an influential financial instrument entered the crypto world. Anyone who bet with the futures on today’s fall of the course, could reap profits. It is time to re-explain the so-called futures contracts.
The origin of today’s futures goes back a long way and is in the futures of agriculture of the 17th century. The deal was very simple: farmers and their prospective buyers agreed on the price and quantity of a particular raw material and secured it. The farmers could not only be sure of selling their goods. Rather, they could calculate with a certain price. On the other hand, buyers were able to hedge against a rise in prices – a win-win situation.
During the 19th century, the system was adapted by the financial system. Futures were used to conclude contracts, which from then on were termed futures contracts. Among other things, they formed credit insurance against banks and were thus fed into the stock exchange cycle. Today, these futures exist for anything salable. Orange juice, soy, oil – or Bitcoin.
Bitcoin futures and the bet on the course
So futures are agreements between two parties to contractually secure transactions. If a buyer and a seller agree on a futures contract, they determine both the date and the price of the respective commodity. This commodity – in our case Bitcoin – will then be traded on a date and time fixed by both parties. A speculative affair – especially in the area of cryptocurrencies.
Suppose, for example, that an investor expects the Bitcoin price to fall further in mid-January. So he decides to buy a futures contract. To do this, he has to pay in advance and make a guarantee payment – a percentage of the price he wants to pay for Bitcoin in January. In principle, he therefore bets on the price development with his commitment. Since he believes that the price is falling, this is called a futures short position. The amount of profit then depends on the difference between the purchase and sale of the contract.
The buyer of this contract then takes a long position – he betting on a price increase. If the investor does not hold upright and the price goes up, the seller will reap the profit. The special thing about the futures contracts is that ultimately no Bitcoin change hands – they only benefit from the price fluctuations (or not).
A safe business?
It now becomes interesting when the investor who takes the short position also owns Bitcoins. So if he calculates with a certain price collapse at a certain point in time, he protects himself from it at the same moment. If the investor should now have owned a certain amount of Bitcoin in December, he could secure by the short position profit.
If the number of Bitcoins held relative to the amount distributed is now reasonably high, it is possible to influence the price. However, it is to be assumed that even in the case of such an influence, there is no cause for panic. Because to completely disassemble the market, should not be in the interest of hypothetical investors.
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