HOW DO BITCOIN FUTURES WORK?

Bitcoins was created by an anonymous programmer called as Satoshi Nakamoto whose identity and existence is not let verified. Bitcoin futures has ought to become the new trading instrument. People have perceived it as a hard concept to understand but this article will make it easier even for a teenager. 

Futures is a term used in place of ‘contract’ in the financial world. It is an agreement to buy or sell assets for a specific price at a specific price. It consists of signed contracts signed by both the parties despite the current market price. Mining is a very popular concept which ought to be known by any investor. The mining process is done by the computer which help to create new bitcoins. Anyone anywhere can set up their device to maintain an account to mine bitcoins. 

HOW DO FUTURES WORK?

In futures, the individual bets on what the price would be in the future. You calculate and then expect the price of the cryptocurrency to grow or fall so that you buy or sell it. The main key point in the contract is A DEFINATE TIE FRAME which is also known as the expiration date.
Bitcoin futures are related to the bitcoin value which allows the spectators to bet on them. Bit coin in itself is unregulated but the futures are traded on regulated basis.

The Bitcoin futures is based on the price of BTC and it works according to the same contracts as normal stock exchange contracts. BTC futures is a good hedging instrument and involves less risk. 

  • Long contracts: Trader BUYS the contract at CURRENT price and sells it at growth.
  • Short contracts: Trader SELLS the contract at CURRENT price and when the prices decline again, the individual will acquire it again. 

Apart from betting on the market, investors can always sell their contracts before the expiry date. However, trading exchanges like CME and CBOE set high barriers which are normally affordable to wealthy individuals or professional investors. At the present, CME offers its contracts with a minimum price fluctuation of 5$ per Bitcoin with a maintenance margin of 50% which is very high.

For example: If the price of one bitcoin is $2 today. You are expecting the price of bitcoin to rise to 7$ in a month. So you buy a one month contract for 100 bitcoins at the present price (2$) which will make the contract worth $700 after a month if your calculations are right. 

In short when the Bitcoin is higher than your contract price agreement, then you profit from surplus. If the prices of the bitcoin go lower than your contract then you will incur losses. The difference will have to be paid and maintained at the collateral level required by the exchange. 

SOME USEFUL TRADING FORMULAE

If you want your future to work, you can use this simple formulae to calculate the approximate risks. The bitcoin prices depend on spot prices.

Calculating the futures price from the spot price
Future Price = Spot Price * (1+rf-d)
rf = Risk free rate 

However, the user should take in respect the legality of Bitcoins IN THEIR TERRITORY. Only a small percentage of bitcoins are illegal. Most of the transactions and exchanges are legal. Countries where inflation is high, avoid legalizing bitcoins in a fear of loosing the little income they receive. Otherwise, large international transfers through bitcoins take place overseas LEAGALLY. 

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