What is cryptofutures
Futures are a derivative financial instrument (derivative). Its meaning is to conclude a contract, according to which the buyer and seller agree only on the price of the underlying asset and the term, execution date. This is actually why the instrument is called futures, from the English future – the future.
The underlying asset of a futures contract can be any commodity, stock, currency pair, etc.. Accordingly, for a crypto futures it will be any cryptocurrency: Bitcoin, Ethereum, Solana, and so on.
Why are derivatives needed? There are cryptocurrencies, and you can easily make money on them.
Principle of operation
In order for trade to be possible, two parties are needed: the seller and the buyer.. Let's say we have two crypto investors, Evgeniy and Oleg. Evgeny wants to buy 10 futures contracts for Bitcoin, and Oleg wants to sell. In the moment, the desire of one corresponds to the desire of the other, and a deal can be concluded. There's nothing unusual here. Much more interesting is how much money our heroes will need.
Let's say the price of one futures contract is $40,000. Thus, the 10 futures contracts in the example would be valued at $400,000. However, the nature of futures is such that there is no need to lay out the entire amount at once; you can limit yourself to only a part (margin). The exchange may allow 20% or 50% of the funds in your account to be traded. In other words, in our example, the heroes need to have $80,000 or $200,000 in their account, respectively. The amount of collateral will depend solely on the exchange.
It is important to note that a futures is a standardized contract. That is, its shape and features are strictly prescribed. At the same time, keep in mind the fact that crypto futures may vary from exchange to exchange.
Where are crypto futures traded?
Crypto futures can be traded on both regulated exchanges and unregulated cryptocurrency platforms. The first include two American platforms: the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). The second type of site is much more extensive. These include all the most famous crypto exchanges: Binance, Bybit, OKX and many others.
The most popular exchange for trading crypto futures is CME. It has the largest open interest (the number of trading futures and options) in Bitcoin.
Interestingly, the first platform to introduce such a tool was CBOE. Literally for a few days at the end of 2017, it overtook its competitors from CME. However, only two years passed and CBOE was forced to abandon margin futures. At the same time, CME has achieved tremendous success in trading these instruments.
Types of futures
In the most general form, there are usually two types of futures – settlement and delivery:
Deliverable futures require delivery of the underlying asset to the buyer before the expiration date of the contract.. If the seller is responsible for delivery and sale, then the buyer is responsible for purchasing and receiving the underlying asset at the price set by the futures. Most often, oil futures are considered as an example of a deliverable futures on an exchange outside the cryptocurrency market: the underlying asset is oil itself, the delivery of which is expected on the expiration date of the contract at an agreed price. In the case of cryptocurrency, the underlying asset is the cryptocurrency itself, for example, Bitcoin.
In practice, the second type has become more widespread among futures.
Settlement futures do not involve delivery of the underlying asset to the buyer on the expiration date of the contract. They allow the calculation and payment of the difference between the contract price and the price of the underlying asset at the time of expiration of the contract.
Bitcoin and altcoins can act as an underlying asset, similar to securities, oil, and other commodities, and actual delivery is not always necessary in exchange trading conditions, where participants have a predominantly speculative interest. Therefore, cryptocurrency futures are common in settlement form.
In addition to the type, futures also take into account: price step, collateral, unit of measurement of the asset, its indication, and so on.. However, futures standards vary from site to site.. Let's look at the difference using CME as an example.
Futures Standard
The minimum contract size on the Chicago Mercantile Exchange is five bitcoins. Calculation is in dollars and cents. Futures are not deliverable, but settled, so at their expiration you will receive only profit, and not the cryptocurrency itself. CME is settled by using the Bitcoin Reference Rate (BRR), which reflects the average price of Bitcoin from four major exchanges: Bitstamp, Coinbase, Itbit and Kraken.
At CBOE the standard was different. There contracts started from one BTC. In addition, the rate was not calculated as an average from several exchanges, but simply took the BTC value from the Gemini exchange. There are generally two types of contracts on Binance: perpetual (eternal) and quarterly. In general, you need to deal with each specific site separately.
Pros and cons of crypto futures
The main advantage is an increase in potential profitability. When buying futures, you need to leave much less money than when buying the same bitcoins. True, there is also the other side of the coin – the risks grow proportionately.
Crypto futures can be used to hedge risks. This is relevant if you have bitcoins in your hands, and you are afraid of their drawdown in price. In this case, you can sell several futures. It will be cheaper, since it is not necessary to cover the full cost.
Hedging is beneficial to large Bitcoin holders who predict a likely decline in the crypto market. If BTC has shown multiple growth over a certain distance and the investor assumes a possible change in the trend, then in this way it is really possible to reduce risks.
Interested market players can be miners and validators who participate in staking and anticipate a possible price drop. For miners, such a strategy allows hypothetically to reduce the risk of the cryptocurrency’s value falling below the level of profitable mining – during the mining process, there is a “cost level” of the mined coin, which consists of the cost of ASIC\GPU and other specialized equipment, the cost of electricity, premises, maintenance, and so on.
Crypto futures also allow institutional investors to safely dive into the crypto industry. If you take CME or CBOE, then they have permission to operate from the US Commodity Futures Trading Commission (CFTC). So here the whole process takes place strictly within the legal framework. Some may also find this fact a plus.
The main disadvantage is that you can very quickly lose all your capital, since the volatility of the cryptocurrency is high, and when trading with leverage, you can lose many times more. There is a need for strict money and risk management. Not everyone can do this. There is also a risk for the seller, since selling the underlying asset in the future at a predetermined price may involve a scenario in which the price of the asset will rise, and the seller will, at best, miss out on profits, and at worst, incur losses. Consequently, risk management and money management are also required here.
Conclusion
Crypto futures are a derivative financial instrument. With its help, investors have the opportunity to trade with greater leverage, which increases potential profits, but at the same time increases the risk of losses. Futures can be traded on a variety of platforms, from the highly regulated CME and CBOE to the semi-regulated. The standard terms and conditions must be reviewed on each platform separately.
This material and the information contained herein do not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.