Futures vs Bitcoin Futures: What’s the Level of Risk?

Futures vs Bitcoin Futures: What’s the Level of Risk?

by June 29, 2020
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Futures represent standardized financial derivatives, i.e. contracts for the sale of certain assets on a certain day in the future and at a predetermined price. The futures contract obliges the buyer to buy the goods in question on a predetermined day and at a predetermined price, regardless of the market price of the subject of the contract at the time of sale.

In practice, a futures contract is used to manage risk or, in other words, to minimize it in the event of a change in the price of certain assets in the future (e.g. airlines protect themselves from a sudden increase in the price of kerosene in the market).
Futures contracts are suitable as a strategic investment that investors include in their portfolio to balance value changes, especially assets with a high level of fluctuation and price volatility, which allows them to deviate less from projected budgets and business plans.

In most countries, futures can be traded before their maturity but only on organized markets, which makes them very liquid futures contracts.

Long and Short Futures Security Positions

The futures contract is concluded for long and short positions. Thus, by taking the so-called long position, the contracting party undertakes to buy the property in the future when the contract expires. More precisely, to invest the liquid asset – money – in smaller goods with a lower degree of liquidity. By taking a short position, the contracting party agrees to sell it – to turn illiquid assets into money.

In addition to achieving the purpose of risk minimization, some investors enter into business with futures contracts for speculative activities and making a profit. For example, they come to long positions when the price of goods is low, and they often approach the sale of securities even before they expire at a higher price than agreed.

BitcoinFutures

As futures have long been intended not only for trading in physical assets but also in financial assets (e.g. government bonds and securities that provide interest yields), at the end of 2017, first on the CBOE and CME Group stock exchanges in Chicago, models of this legal business, which include the Bitcoin trade, appeared.

In this case, the agreement will be based on the price of Bitcoin in the future, that is, it will represent a kind of bet on whether the price of this cryptocurrency will go up in the future or will fall.

This novelty in cryptocurrency trading has enabled investors who aren’t interested in acquiring ownership in cryptocurrencies but only want, mostly for speculative reasons, to make money at the unstable price of Bitcoin in the future. Platforms to purchase bitcoins are numerous, while there are places to buy Bitcoin with credit card in which case you can avoid hidden fees.

Although futures normally fall under riskier securities, when they have Bitcoin as their subject, it can be said that the level of risk that’s taken in this case is very high. But on the other hand, it can provide the investor with quick and very high earnings, which no other security or type of property can provide.

Introduction of Bitcoin in the Securities Market

The approval of Bitcoin futures contracting in the USA at the end of 2017 was a positive signal in the direction of legalization and acceptance of Bitcoin, which was one of the reasons for the price increase, measured in hundreds of estimates in just a few months.

Thus, just a day after the activation of the first Bitcoin futures on a large regulated exchange, such as the Chicago Board Options Exchange (CBOE), the price jumped almost 10% to the then 16,936 USD, and a few days later it broke the psychological threshold of 20,000 USD.

The fact that 1,907 contracts with short positions (investors who bet on the decline in the value of Bitcoin) were concluded on the same stock exchange on January 9, 2018, shows how suitable the ground for cryptocurrencies is for speculators. It caused, among other things, that on January 17, 2018, the price drops to 10,900 USD.

In addition to speculators, cryptocurrency owners have also entered into the business with Bitcoin futures, and in this way, they want to reduce the risk of further investment in Bitcoin.

However, the entry of futures and the introduction of Bitcoin into the regulated securities market didn’t have a constant positive impact on the price of this cryptocurrency.

Featured image credit: Money photo created by freepik – www.freepik.com

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