Many people wonder how bitcoin futures work. From a strictly technical point of view, these are normal futures contracts, similar to those that have existed on the financial markets for a long time. Their particularity lies in the fact that they have BTC as their underlying, or indices linked to the price of BTC.
Futures are contracts between two parties for the purchase or sale of assets at a future date, that is, at maturity, and at a certain price agreed between the parties themselves. When the contract expires, the parties are de facto obliged to honour the agreements by buying and selling at the previously agreed price, regardless of whether the price of the underlying asset has decreased or increased since then.
They are used as a kind of insurance against the risks of price fluctuations, although very often they are used to speculate.
They are also tradeable, i.e. once a futures contract has been issued it can be sold on the market by the parties involved.
When a futures contract is stipulated between two parties, one party agrees to buy and the other agrees to sell. A commitment to buy the underlying is considered as opening a long position, while a commitment to sell is considered as opening a short position.
Futures contracts were created specifically for the exchange of commodities, but they can also be used to trade any asset, including purely financial assets, such as bitcoin or other cryptocurrencies.
Bitcoin futures can be used to hedge against significant fluctuations in the value of BTC, although very often they are used primarily to speculate on the price of BTC without actually owning any.
In addition, many exchanges that allow the trading of BTC are not fully regulated, while those that offer BTC futures, such as the ICE or the CME, are fully regulated, allowing trading even to individuals who lack confidence in non-regulated trading, or to institutional investors who are simply not allowed by law to invest in markets that are not fully regulated.
Each individual contract contains a certain volume of the underlying asset, and in the case of bitcoin futures, this volume is usually 1 BTC. Furthermore, there are futures contracts based on physical bitcoins, such as those of Bakkt, and others based on indices that replicate the price, such as those of the CME.
Those not based on physical bitcoins are settled in cash, which means that at expiration the exchange takes place in normal fiat currencies, and not in BTC.
Ever since the first bitcoin futures contracts were placed on the market in December 2017, their success has been growing, resulting in significant trading volumes over the past months.
In fact, on the platforms where it is possible to trade both physical bitcoins and bitcoin futures contracts, the trading volumes tend to consistently exceed those of real BTC, due to the peculiar characteristics of the futures, which allow very easy exchanges and within the reach of even the most demanding investors. This is a feature that is not only valid in the bitcoin market, but also for other commodities, although it means not owning the underlying, but just “betting” on its future price.