With the rise of Bitcoin in the recent years, there is a multitude of ways for people to earn money by capitalizing on the bullish rise of this cryptocurrency – whether it is by mining Bitcoin or trading it. However, what if there was a way for you to earn money by trading Bitcoin without actually owning a digital copy of the Bitcoin at all?
Introducing Bitcoin Futures
The purpose of Bitcoin Futures is exactly what its name suggests – to facilitate the trading of a specific cryptocurrency based on its predetermined price in relation to its price on a specific date in the near future. Unlike blockchain technology, the concept of a futures contract has been around for decades, and it is an effective way to mitigate risk – or increase them, depending on how aggressive you are planning to trade.
To understand what a Bitcoin Futures contract is, try imagining the scenario below:
- Andy and Bob come to an agreement that Andy will buy 1 BTC from Bob at a price of $20,000 on a certain date in the future. Andy, as the buyer, will often try to “go short” on the contract, so as to purchase said amount of Bitcoins at a lower price. On the other hand, Bob, as the seller, will try to “go long” in order to sell those Bitcoins at a higher price.
- Fast forward to the future. If the price of 1 BTC on that day is $25,000, Bob will have to pay Andy $5,000. Conversely, if the price of 1 BTC on that day is $15,000, Andy will have to pay Bob $5,000.
A Bitcoin Futures contract will also include an initial margin requirement, which essentially is a deposit that is made by both parties to the contract as collateral. Depending on the margin rates, the investors will also have a certain leverage factor that allows them to have a stronger purchasing power than the deposit that they made. Initial margin requirements can be as low as 5 – 10%, but in the case of Bitcoin and other cryptocurrencies, the margin rates are usually much higher to account for their volatility and fluctuating prices. To put things in perspective, the CBOE’s Bitcoin Futures contract has a 40 percent margin rate, while the CME’s contract has a 35 percent margin rate.
To know more about the CME’s Bitcoin Futures contract that is launching this Sunday (17th December 2017) and how it might affect the price of Bitcoin and other altcoins, click here.