Exchange education: Futures, offset transactions, hedging

Cryptocurrencies are increasingly being integrated into the classical financial trading environment. Trading futures contracts has long been available on the derivatives market. But only now is it making its way into the world of cryptocurrency. The launch of Bitcoin futures has long been anticipated by many traders. The start of trading in these financial instruments revived the cryptocurrency community.

What are Bitcoin futures

A fixed price for a commodity that will be delivered over a certain period of time at the time the transaction is concluded - this is the meaning of a futures contract.

The concept of a Bitcoin futures contract revolves around users who agree to sell or buy a certain amount of Bitcoin once it reaches a price set for a future date.

Bitcoin futures are trader-type contracts. tools. A trader’s profit depends on his ability to predict the Bitcoin exchange rate, that is, buy an asset cheaper and sell it more expensive. For example, a futures is purchased at 6,000, the price of a coin by the time the futures closes rises to 8,000, but the seller is obliged to sell the asset at a fixed price of 6,000. In this case, the buyer receives a net profit by reselling Bitcoin at 8,000.

In practice, such transactions are not concluded often. More often, traders give preference to offset transactions - trading exclusively in futures.

An offset transactionis the resale of futures to another interested party. In fact, the buyer resells the obligations assumed under the contract and makes a profit. Specifically, the buyer of a futures contract buys the right to sell Bitcoin at a specific price, the seller agrees to accept Bitcoin on a certain future date at that specific price. The buyer often takes a “short position” in hopes of purchasing a specified amount of Bitcoin at a better price.” The seller takes a “long” position in hopes of receiving a higher price for Bitcoin on the settlement date.

Bitcoin futures aresettleds. That is, there is no real delivery of bitcoin from the seller to the buyer of the contract. At the time of expiration of the contract, a monetary settlement takes place between its parties for the difference between the contract price and the actual price (spot) of the underlying asset.

How Bitcoin futures are traded

Trading occurs in three stages:

⁃ Entering the market - opening a position. This is an offer of your forecast for the price of a coin

⁃ Waiting for the moment. Essentially waiting for the implementation of this forecast, the expected price. 

⁃ Closing a position. Completion of the transaction - fulfillment of obligations under the futures or its resale and exit from the market..

Until the end of the trading day, the trader has no profit or loss. When the exchange closes positions, a recalculation is made - profits are accrued or losses are written off.

The exchange acts only as an intermediary between the selling and buying parties. It also guarantees the fulfillment of obligations under futures contracts. The trader has the right to resell futures without the seller's consent, at his discretion, before their expiration date. With such resale, you can make a profit regardless of price fluctuations. 

 Futures trading does not require payment of the entire amount specified in the contract. For the right to own a futures, a trader gives only guarantee, a kind of collateral. As a rule, it is 10% -15% of the contract amount. This “leverage” available when trading with futures contracts allows you to multiply the expected profit. At the same time, risks during margin trading always remain.

 The guarantee is not a fixed amount. If the cryptocurrency rate fluctuates sharply or the contract expiration date approaches, the amount of the guarantee may change. Therefore, it is important to monitor the status of your position and the level of collateral. Otherwise, the broker can forcefully close the margin call position at the moment if the exchange increases the guarantee collateral and there are no additional funds in the account.

Futures are used both directly for trading on the exchange and for the purpose of hedging risks.

Hedgingis insurance of financial risks. Hedging protects against the risk of unexpected price fluctuations. Essentially, it is an agreement to sell or buy an asset (Bitcoin) at a certain price at a set time. To minimize the risk of unexpected fluctuations in the market price.

When purchasing Bitcoin futures, it is necessary to take into account that large exchanges determine a high threshold for entering the market, i.e., the minimum cost of purchased futures.

Advantages of Bitcoin futures

The trader gets the opportunity to use a much larger number of instruments located on various global platforms. This allows you to expand the opportunity to diversify your investment portfolio.. Futures have high liquidity, which leads to the possibility of using a much larger number of trading strategies. Any price fluctuation in the market can bring income to the trader, with the right approach and analysis of the situation. With the advent of the possibility of trading futures contracts on Bitcoin, large hedge funds are entering the market. What increases the capitalization of Bitcoin. The estimated volume of investments in cryptocurrencies with access to the derivatives market of the world's leading exchanges could amount to more than three trillion dollars.

The key risk for a trader, as in any exchange trading, is the loss of funds if the forecast is unsuccessful. Futures contracts are an attractive instrument for speculators. Speculators are interested in the volatility of the price of Bitcoin, which means that they will open short and long positions several times a week, trying to pump up the price of the asset.