The BTC spot – market allows traders to buy and sell Bitcoin at any time, but it also comes with some restrictions. For example, investors can only make money when the price of Bitcoins goes up. If the price drops, anyone with BTC will suffer a loss. Even those who were lucky enough to sell before a significant drop and intended to buy back at a lower price need prices to bounce back up. If that doesn’t happen, there is no way to make a profit. Another characteristic of spot markets is that they force traders to hold the assets they want to speculate on.
A Bitcoin derivative, on the other hand, can allow people to trade contracts that follow the price of Bitcoin without having to actually own any Bitcoin.
What are bitcoin futures?
As described above – it is simply a contract or agreement between two parties to buy and sell BTC at a given price at a specific date in the future (hence the name).
However, neither party is required to actually own the underlying asset, in this case bitcoin. Instead, they simply settle the contract in US dollars or using stablecoins such as USDT. What distinguishes futures contracts from other derivatives is the specific settlement date.
How to invest in bitcoin futures?
Let’s look at an example of someone trading bitcoin futures. One of the first things a trader will have to decide on is the length of the contract. Exchanges offer several options such as weekly, bi-weekly, quarterly, etc. Let’s say you want to trade weekly BTC contracts and each contract is worth $1 when the price is 1 BTC = $50,000. This means that you will need 50,000 contracts to open a position worth 1 BTC. At this point, a trader can open a long position (betting on the price going up) or a short position (betting on the price going down). Whichever direction you choose, when you open a position, the exchange will essentially match you with someone going in the opposite direction. A week later, when the contracts are due to settle, one of the traders will have to pay the other.
If you decide to take a short position and a week later the price has fallen, you will make a profit. If the price went up, you will incur a loss.
What are bitcoin options?
Bitcoin options are also derivative contracts that follow the price of bitcoins, except that they don’t necessarily settle on their expiration date. The reason they are called options is because they give traders the ability or right to buy or sell at predetermined prices at certain dates in the future.
What are open-ended swaps / cryptocurrency contracts?
Perpetual bitcoin contracts are derivatives that, unlike futures or options, have no expiration or settlement date. Traders can keep their positions open as long as they want under certain conditions. One of them is that there must be a minimum amount of BTC ( margin ) in the account. Another important factor to consider is the funding amount. This is a unique mechanism that helps to tie the price of the perpetual contract to the price of Bitcoin.
Due to time constraints, the price of a futures contract will always be the same as the price of the underlying asset at the time of expiration. Since perpetual contracts do not expire, their prices can begin to deviate significantly from Bitcoin prices. The solution to this problem is for one side of traders to pay the opposite side.
Cryptocurrency trading offers several growth prospects for a good trader. The trick is to develop a strategy before starting crypto derivatives. A trader must analyze and understand the risks associated with derivatives trading before starting a trade. One thing is for sure, the cryptocurrency derivatives market is not where beginners should start.