Futures

Futures are a type of financial derivative that represents an agreement between two parties to buy or sell an asset (in this case, cryptocurrency) at a predetermined price in the future. The main purpose of futures is to profit from the price fluctuations of cryptocurrencies without owning the actual asset.

Key features of futures:

1. Agreement for the future: The buyer agrees to buy, and the seller agrees to sell, the asset on a specified date at a predetermined price.
2. Leverage: Most cryptocurrency exchanges allow the use of leverage, which amplifies potential profits (and risks).
3. No ownership of the asset: Market participants do not own the cryptocurrency; they only enter into a contract based on its price.
4. Two positions:
   • Long (Buy): Buying a futures contract to profit from a price increase.
   • Short (Sell): Selling a futures contract to profit from a price decrease.

Example of how futures work:

Suppose you believe that in three months, the price of Bitcoin will rise from $30,000 to $40,000. You buy a futures contract to purchase Bitcoin at the current price of $30,000. If the price increases to $40,000 in three months, you profit from the price difference.

If the price, however, falls below $30,000, you will incur a loss.

Types of futures:

1. Classic futures: Contracts with a fixed expiration date when the obligations must be fulfilled (either the asset is delivered or the contract is settled).
2. Perpetual (eternal) futures: Futures contracts without an expiration date. These are popular on cryptocurrency exchanges like Binance and BitMEX. The key mechanism here is funding, which is a periodic adjustment to keep the contract price close to the spot market price of the asset.

Advantages of futures:

• Profit from price decline (shorting).
• Leverage: Futures allow for using leverage, which can increase potential profits.
• Hedging: Futures can be used to protect against unfavorable price fluctuations if you already own cryptocurrency.

Risks:

• High risk of loss: Especially when using leverage, as the volatility of cryptocurrencies can lead to quick and significant losses.
• Margin requirements: If the price moves against your position, the platform may require additional funds to maintain your position.

Futures are widely used by experienced traders for speculation and hedging risks in cryptocurrency portfolios.