By now, most of you would have heard about a term called “Bitcoin Future Contracts”. A lot of buzz is going on that Wallstreet and other main stream investment firms will start trading Bitcoin Futures.
For a layman, what is Bitcoin Futures?
In a traditional Bitcoin Exchange, a buyer will buy a Bitcoin from a seller with X amount of $$. Once the transaction is successful, the buyer will now own a Bitcoin which can be used for any other purpose like payments, purchase and so on.
However, A futures contract allows a trader to place a leveraged bet on whether the price of the Bitcoin will move higher or lower before the contract (Ex: In next one hour) expires. A trader who thinks the price will rise can go “long,” while a trader who expects the price to fall can go “short.” In futures, there is a short bet for every long and vice versa.
Bitcoin futures will be cash settled, meaning no bitcoins will actually change hands when a contract expires. Winning traders effectively collect their gains from the losers. As with most contracts, traders will likely have closed out positions, collecting gains or ceding losses, before expiration.
Exchange prices are called “spot prices”. You can buy BTC on-the-spot there, transfer it to your wallet, and it’s yours.
Futures contracts are a guess as to what the price of BTC will be at the expiration date of the contract. So unless you expect the price to be exactly the same as it is right now, the prices between spot and futures contract will be different.
Ex: People trading the futures contracts expect BTC to be worth $2K more in 5 weeks or $2K less when the current contract expires.
Also, as there are not enough Bitcoins available for these traders to actually buy/sell, the futures contract will allow them to bet on the price of Bitcoin which is being actually traded world wide by just holding a partial amount of Bitcoin in their trading account. This allows huge amount of money to be used for betting on the price of Bitcoin without actually owning the equivalent amount in Bitcoins.
If you are not a professional trader, then it is better advised to stay away from Futures contract.