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Futures markets have been in existence for the more mature asset classes, including commodities and equities for quite some time, however, Bitcoin futures launch is a major step towards the legitimisation of the most popular cryptocurrency.
Within a futures market, an investor is able to trade futures contracts, which involves the purchase of an asset class at a particular price with a settlement date set at some point in the future.
The underlying value of the futures contract for a particular instrument is then priced according to the actual asset itself, whether gold, crude, an index or individual stock.
Futures markets have been prevalent in the financial markets for many years, with the first modern era futures market reported to have been the Dojima Rice Exchange, launched in Japan in 1710. Some suggest that the London Metal Exchange that was founded in the 19th century traces back to the 16th century and that’s before considering 1750 BC’s Code of Hammurabi that allowed the sales of goods and assets to be delivered for an agreed price at a future date.
Futures contracts contain the details of the asset class in question together with the purchase size, final trading day, maturity date and exchange on which the contract is being bought or sold. Futures contracts are created based on demand and do not get automatically created in the marketplace, involving two parties, where one party is going long on an asset class, while the other goes short.
Upon expiry of a futures contract, the settlement is either physical, in the case of commodities, or via a cash settlement in the case of Bitcoin, though the futures contracts are likely to change hands on numerous occasions before expiry. It is important to note that the futures market is used by investors looking to hedge exposures to a particular instrument or by speculators, neither of whom are actually looking for physical delivery that is akin to the spot /cash markets.
As investors have become more knowledgeable about the markets and the influences on asset classes, the futures markets have become a guide for investors on the likely direction of commodities, stocks and indexes on a given day, with crude oil futures, gold futures and the the Dow Jones reflecting investor sentiment towards the respective instruments and the direction based on the flow of information that influences supply and demand dynamics.
For investors looking to hedge, there will already be some form of an exposure to the spot or physical and the futures markets allow the company or investor to protect the upside or downside with a futures contract.
As an example, airlines are well known to protect themselves against significant rises in crude oil prices, by buying a futures contract today with a specified price and delivery date in the future, on the assumption that oil prices will be on the rise over the period in question.
In this case, the airline is exposed to the cost fluctuations of crude oil as a physical but is looking to protect itself in the futures market. If crude rises in value by $20 per barrel over the year and the airline has a futures contract at $5 per barrel above the current price, the impact on earnings is significantly less than without the execution of the futures contract. In this example, the airline would be taking a long position, while the party obligated to deliver the crude oil will be taking a short position, as they are the seller, while the airline is the buyer. An airline is unlikely to take a short position in crude oil, as declining prices benefit the bottom line.
In contrast to investors or companies looking to hedge exposures, speculators will be looking to benefit from the price fluctuations of an asset class without actually having a physical exposure to the asset class in question. The incentive for a speculator is profit from the general direction of contracts decided upon by their outlook on supply and demand for the particular instrument.
In summary:
Hedgers can go either long or short. Short positions are taken to secure a price now in order to protect the hedger from declining prices in the future, while long positions protect against rising prices in the future.
Speculators go short on the expectation of prices falling in the future while going long on the assumption that prices will be on the rise.
With Bitcoin now having been in existence since 2009 and become a sizeable instrument by market cap comparable to some of the largest listed companies on the U.S equity markets, it comes as a little surprise that futures exchanges have moved ahead on offering investors with the option of Bitcoin futures contracts.
For Bitcoin, miners will receive some relief from the launch of the futures market, with the sizeable investments into mining equipment, not to mention exponential gains, needing some protection against price declines, while the speculator may be looking for the rally to continue and reach the stratospheric heights predicted by some in the marketplace, or in some cases, for the bubble to burst.
Bitcoin futures based on Gemini’s auction prices are available for trading
For those looking to enter the Bitcoin futures market, the first and fundamental question is whether the motivation is speculative or to protect current Bitcoin earnings from any downside.
Choice of exchange may be considered arbitrary, but it would be best to go with the exchange with the greatest number of futures contracts issued, as both will be considered liquid from an investor perspective.
As we addressed before, contract sizes differ on the respective exchanges as do margin requirements, so these are also considerations.
When looking to trade with margin, this is essentially the funding component of the trade executed on the futures exchange.
As investors will not actually own Bitcoin itself, there is no need for the full value of the purchase to be paid in advance of the contract expiry date. In the event of an investor holding a contract until the expiration date, the amount paid, if out of the money, is limited to the difference between contract price and the actual price. The margin is placed on a margin funding account as collateral for the trade.
In addition to the collateral, also referred to as initial margin, investors are required to meet Mark-to-Market calls during the duration of the futures contract.
The Mark-to-Market (“MTM”) margin is the difference between the cost of the position held and the current market value (“CMV”) of the position. In the event of a loss, the exchange will fund any margin shortfalls stemming from a MTM call from the investor’s margin funding account. The reverse is also possible, where the exchange funds the account where the investor has margins in excess of the required amount.
In the event that the margin funding account falls below acceptable levels, the investor will then be required to fund the account to meet future MTM requirements.
As we mentioned above, contract sizes between the 2 exchanges are different.
Final settlement on both exchanges is in U.S Dollars, with no actual Bitcoins held during the duration of the contract that requires settlement.
With futures contracts being a 2-sided market, involving a buyer and a seller, counterparty risk on the final settlement is absorbed by the respective clearing houses and not the party in the money.
It’s worth noting that, while those looking to hedge Bitcoin’s value are likely to hold futures contracts through the expiration, speculators are likely to be buying and selling Bitcoin ahead of expiration, taking advantage of daily movements in response to market noise.
For this reason, market liquidity is particularly important for those holding futures contracts as an inability to find a buyer can have quite dire consequences to the futures market and the price of Bitcoin itself.
The gains have come off the back of Bitcoin futures seeing an uptick in value above Bitcoin’s actual value at the time of launch of each of the respective exchanges.
With the general theory being that the smarter institutional money is going into the Bitcoin futures market, investors in Bitcoin will be looking towards the futures market as a guide to the future direction of Bitcoin, based on information available in the marketplace.
Increased appetite for lower prices would see the value of Bitcoin futures contracts decline, which would likely lead to price declines in Bitcoin itself.
When we look at the Dow mini or the S&P500 futures, daily movements have a material impact on the direction of the main indexes each day, barring the arrival of new information to which investors respond during normal trading hours.
For now, the number of contracts is considered relatively small and investors may take less direction from the respective exchanges, but we will expect the number of contracts to grow over time and provide some idea on which direction Bitcoin will take on a given day.
Exchange to choose
If you have a interesting in trading Bitcoin, Ethereum, EOS or other cryptocurrency futures in a professional exchange, JEX Exchange would be a good choice.
It’s the leading Bitcoin futures & options trading exchange in the world.
It's official website is as follows www.jex.com
For more questions, you could find them in the following ways
Find us on
Futures markets have been in existence for the more mature asset classes, including commodities and equities for quite some time, however, Bitcoin futures launch is a major step towards the legitimisation of the most popular cryptocurrency.
Within a futures market, an investor is able to trade futures contracts, which involves the purchase of an asset class at a particular price with a settlement date set at some point in the future.
The underlying value of the futures contract for a particular instrument is then priced according to the actual asset itself, whether gold, crude, an index or individual stock.
Futures markets have been prevalent in the financial markets for many years, with the first modern era futures market reported to have been the Dojima Rice Exchange, launched in Japan in 1710. Some suggest that the London Metal Exchange that was founded in the 19th century traces back to the 16th century and that’s before considering 1750 BC’s Code of Hammurabi that allowed the sales of goods and assets to be delivered for an agreed price at a future date.
Futures contracts contain the details of the asset class in question together with the purchase size, final trading day, maturity date and exchange on which the contract is being bought or sold. Futures contracts are created based on demand and do not get automatically created in the marketplace, involving two parties, where one party is going long on an asset class, while the other goes short.
Upon expiry of a futures contract, the settlement is either physical, in the case of commodities, or via a cash settlement in the case of Bitcoin, though the futures contracts are likely to change hands on numerous occasions before expiry. It is important to note that the futures market is used by investors looking to hedge exposures to a particular instrument or by speculators, neither of whom are actually looking for physical delivery that is akin to the spot /cash markets.
As investors have become more knowledgeable about the markets and the influences on asset classes, the futures markets have become a guide for investors on the likely direction of commodities, stocks and indexes on a given day, with crude oil futures, gold futures and the the Dow Jones reflecting investor sentiment towards the respective instruments and the direction based on the flow of information that influences supply and demand dynamics.
For investors looking to hedge, there will already be some form of an exposure to the spot or physical and the futures markets allow the company or investor to protect the upside or downside with a futures contract.
As an example, airlines are well known to protect themselves against significant rises in crude oil prices, by buying a futures contract today with a specified price and delivery date in the future, on the assumption that oil prices will be on the rise over the period in question.
In this case, the airline is exposed to the cost fluctuations of crude oil as a physical but is looking to protect itself in the futures market. If crude rises in value by $20 per barrel over the year and the airline has a futures contract at $5 per barrel above the current price, the impact on earnings is significantly less than without the execution of the futures contract. In this example, the airline would be taking a long position, while the party obligated to deliver the crude oil will be taking a short position, as they are the seller, while the airline is the buyer. An airline is unlikely to take a short position in crude oil, as declining prices benefit the bottom line.
In contrast to investors or companies looking to hedge exposures, speculators will be looking to benefit from the price fluctuations of an asset class without actually having a physical exposure to the asset class in question. The incentive for a speculator is profit from the general direction of contracts decided upon by their outlook on supply and demand for the particular instrument.
In summary:
Hedgers can go either long or short. Short positions are taken to secure a price now in order to protect the hedger from declining prices in the future, while long positions protect against rising prices in the future.
Speculators go short on the expectation of prices falling in the future while going long on the assumption that prices will be on the rise.
With Bitcoin now having been in existence since 2009 and become a sizeable instrument by market cap comparable to some of the largest listed companies on the U.S equity markets, it comes as a little surprise that futures exchanges have moved ahead on offering investors with the option of Bitcoin futures contracts.
For Bitcoin, miners will receive some relief from the launch of the futures market, with the sizeable investments into mining equipment, not to mention exponential gains, needing some protection against price declines, while the speculator may be looking for the rally to continue and reach the stratospheric heights predicted by some in the marketplace, or in some cases, for the bubble to burst.
Bitcoin futures based on Gemini’s auction prices are available for trading
For those looking to enter the Bitcoin futures market, the first and fundamental question is whether the motivation is speculative or to protect current Bitcoin earnings from any downside.
Choice of exchange may be considered arbitrary, but it would be best to go with the exchange with the greatest number of futures contracts issued, as both will be considered liquid from an investor perspective.
As we addressed before, contract sizes differ on the respective exchanges as do margin requirements, so these are also considerations.
When looking to trade with margin, this is essentially the funding component of the trade executed on the futures exchange.
As investors will not actually own Bitcoin itself, there is no need for the full value of the purchase to be paid in advance of the contract expiry date. In the event of an investor holding a contract until the expiration date, the amount paid, if out of the money, is limited to the difference between contract price and the actual price. The margin is placed on a margin funding account as collateral for the trade.
In addition to the collateral, also referred to as initial margin, investors are required to meet Mark-to-Market calls during the duration of the futures contract.
The Mark-to-Market (“MTM”) margin is the difference between the cost of the position held and the current market value (“CMV”) of the position. In the event of a loss, the exchange will fund any margin shortfalls stemming from a MTM call from the investor’s margin funding account. The reverse is also possible, where the exchange funds the account where the investor has margins in excess of the required amount.
In the event that the margin funding account falls below acceptable levels, the investor will then be required to fund the account to meet future MTM requirements.
As we mentioned above, contract sizes between the 2 exchanges are different.
Final settlement on both exchanges is in U.S Dollars, with no actual Bitcoins held during the duration of the contract that requires settlement.
With futures contracts being a 2-sided market, involving a buyer and a seller, counterparty risk on the final settlement is absorbed by the respective clearing houses and not the party in the money.
It’s worth noting that, while those looking to hedge Bitcoin’s value are likely to hold futures contracts through the expiration, speculators are likely to be buying and selling Bitcoin ahead of expiration, taking advantage of daily movements in response to market noise.
For this reason, market liquidity is particularly important for those holding futures contracts as an inability to find a buyer can have quite dire consequences to the futures market and the price of Bitcoin itself.
The gains have come off the back of Bitcoin futures seeing an uptick in value above Bitcoin’s actual value at the time of launch of each of the respective exchanges.
With the general theory being that the smarter institutional money is going into the Bitcoin futures market, investors in Bitcoin will be looking towards the futures market as a guide to the future direction of Bitcoin, based on information available in the marketplace.
Increased appetite for lower prices would see the value of Bitcoin futures contracts decline, which would likely lead to price declines in Bitcoin itself.
When we look at the Dow mini or the S&P500 futures, daily movements have a material impact on the direction of the main indexes each day, barring the arrival of new information to which investors respond during normal trading hours.
For now, the number of contracts is considered relatively small and investors may take less direction from the respective exchanges, but we will expect the number of contracts to grow over time and provide some idea on which direction Bitcoin will take on a given day.
Exchange to choose
If you have a interesting in trading Bitcoin, Ethereum, EOS or other cryptocurrency futures in a professional exchange, JEX Exchange would be a good choice.
It’s the leading Bitcoin futures & options trading exchange in the world.
It's official website is as follows www.jex.com
For more questions, you could find them in the following ways
Find us on
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Co to jest USDQ i Q DAO? Kompletny przewodnik od PLATINUM ENGINEERING. Czysty Co to jest USDQ i Q DAO? Kompletny przewodnik od PLATINUM ENGINEERING
Mihaill Kudryashev, inżynier front-end w PLATINUM ENGINEERING , napisał ten artykuł, starając się podnieść świadomość na temat USDQ , stablecoin , który jego zespół pomaga rozwijać. Wśród największych korzyści, USDQ przynosi pełną decentralizację i możliwości predykcyjne. Wkrótce będą jeszcze w pełni wspierane stabilne monety: JPYQ, KRWQ, SGDQ, HKDQ, CNYQ, RUBQ w ramach Q DAO governance. Powoli ucząc się więcej o blockchains, Mihail skutecznie przekształcił niejasne pomysły w skuteczne rozwiązania front-end z silnym interfejsem użytkownika / UX. W swoim zespole pomógł wielu startupom kryptograficznym usłyszeć swój głos w powstającej globalnej społeczności kryptograficznej. W tym artykule Mihail analizuje kluczowe korzyści, jakie użytkownicy czerpią z korzystania z USDQ.
USDQ zapewnia stabilność, bez potrzeby angażowania starszych źródeł finansowania
Jak monety USDQ i Q DAO działają w ekosystemie?
USDQ jest zdecentralizowanÄ… stablecoin , która wykorzystuje algorytmy, aby zapewnić wiÄ™kszÄ… stabilność i niezawodność. Jest wspierany przez Bitcoin (kolejne 10 najlepszych kryptowalut zostanie dodanych w przyszÅ‚oÅ›ci). Elegancki system umieszcza wszystkie transakcje na blockchain i umożliwia użytkownikom wykonywanie transakcji transgranicznych i poÅ›rednich w dowolnym czasie iz dowolnego miejsca. Jest on powiÄ…zany z wartoÅ›ciÄ… USD, tj. 1 USDQ zawsze równa siÄ™ 1 USD. Projekt ekosystemu zapożycza siÄ™ w dużym stopniu z uÅ‚amkowych systemów bankowych. W skrócie, USDQ jest stablecoin skierowany do klienta, a Q DAO to wewnÄ™trzna moneta „operacyjna”; razem pomagajÄ… stworzyć stabilnÄ… bezpiecznÄ… przystaÅ„ dla każdego, kto chce zabezpieczyć siÄ™ przed szalejÄ…cÄ… zmiennoÅ›ciÄ… rynków kryptograficznych.
Wprowadzenie do Q DAO i USDQ
There's a number of factors that prevent mass adoption of cryptocurrencies. The biggest factor among this is high volatility, seen in crypto. Bitcoin, the oldest and most popular coin, has been fluctuating with prices oscillating between 20,000 and 3,500 in just one year of 2018. No potential adopters, be it merchants or individuals, would be happy with suffering huge losses that such drastic changes can entail. And it's this high volatility that USDQ is set to address, bringing stability and convenience.
Tether (USDT) is probably the most well-known and widely used stablecoin. However, it has been embroiled in various controversies from the very start with no end to these in sight. Although the system is supposed to assure the 1-to-1 fiat reserves for all Tether units created, the website content has been recently changed to say that the issuer views not only cash in the bank, but also various loans to other companies, as the reserves. Both regulators and crypto enthusiasts have voiced concerns, which might bode ill for Tether in the months to come.
USDQ works differently. Here, the stablecoin is pegged to US Dollar and backed by Bitcoin (+top 10 other cryptocurrencies in future). It's similar to lending operations and fractional banking systems. Overcollateralization is used to mitigate potential unexpected changes in assets prices.
The USDQ ecosystem is highly transparent as all of the operations are recorded on the immutable Ethereum blockchain, open to review by anybody and at any time. The smart contracts bring automation to business processes and eliminate the need for middlemen to assure trust and prevent abuse.
In order to determine how viable USDQ will be in the future, we need to discuss the two tokens used within the ecosystem.
Review of Q DAO and USDQ
Q DAO is governance token, entitles holders to participate in voting for new decisions. Importantly, holders are interested seeing Q DAO's prices growing and thus they are incentivized to thoroughly review proposals and deliver the best decisions. In this way, Q DAO imbues higher democracy and decentralization, on which many current crypto projects lag.
In addition, all the fees, charged for the system use, can be paid only in Q DAO.
In order to create USDQ, a user needs to transfer Bitcoins into a Collateralized Debt Contract (CDC). This will automatically trigger the smart contract to generate USDQ and send it to the user. In order to change USDQ back into crypto assets, users need to pay back the amount of USDQ they input and the fees, chargeable in Q DAO Tokens. Whenever this is done, USDQ is automatically destroyed and the Collateralized Debt Сontract is closed.
In addition by getting USDQ directly at the company's website, users can trade in USDQ on secondary markets. It's as easy as trading Bitcoin or Ethereum or any other coin.
Traders can store both coins in their wallets, assuring higher security. The stability and ease of use for USDQ open up wide ranges of adoption for both businesses and end consumers alike.
What makes USDQ stand apart
The main difference between projects like Tether and USDQ is complete transparency and openness in the inner workings of USDQ. All the data is easily accessible on the blockchain and there are no rumors or controversies as to the reserves held by the team, potential conflicts of interest or hidden agendas.
The CDС mechanics ensure that it's impossible to create fake units of USDQ, as smart contract can be activated only after an amount in Bitcoins is input. The development is being done completely transparent. Interested parties can review the smart contract, presented on the website. The audits and peer reviews were carried out to assure the highest quality of smart contract. The website-based scanner enables to track all the data about each and every transaction, including time, amount and collateral size.
In addition, should a "black swan" event occur, i.e. a drastic fall in Bitcoin prices, Q DAO is sold on secondary markets. Bitcoin value is liquidated to make a USDQ buyback procedure, which prevents any losses on the part of the system's users.
Additionally, PLATINUM BLOCKCHAIN ENGINEERING which is helping to develop the ecosystem is working hard to build up long-term partnerships with stakeholders in the crypto industry. The more liaisons the team wins, the better outlook for USDQ will be.
Why do we need stablecoins anyway?
Different assets produce varying levels of volatility in prices, when compared to each other. For instance, the purchasing capacity of US dollar has reduced over time with 1 USD from 1913 equaling 24 USD today (2019). This happens due to inflation 3-10% per year.
In comparison, Bitcoin almost tripled in value in 2018 and then fell down by as much. Thus, fiat currencies are more stable, when compared to cryptocurrencies.
Stablecoins don't attempt to fight inflation. Instead, coins like Tether and USDQ peg themselves to US dollar, bringing relatively higher stability to crypto trading communities. One of the most famous transactions with Bitcoin is when a pizza was bought with Bitcoin back in 2010. At that time, the pizza ended up costing just a couple of bucks, but today it costs millions. Although stablecoins continue to be impacted by inflation and exchange rates that come to them from fiats they peg themselves to, they are nowhere near the mindboggingly high volatility of crypto assets.
One of the major use cases for stablecoins like USDQ is concluding long-term contracts. For instance, when using a popular decentralized platform Augur, users can bet on the price of oil in 5-10 years. The problem is that you won't only have to account for future changes in oil prices, but also for prices in Ethereum or Bitcoin that you use to make the bet. USDQ solves this problem elegantly and without much trouble. Using it, users don't have to consider future changes in Bitcoin prices and they can concentrate on what they've come here for - betting on future events. And they don’t have to worry about technical details as it’s easy to purchase USDQ and use for trader’s purposes.
Betting industry is just one of the many use cases, where USDQ can bring benefits. It can be successfully used for any transactions done across borders and long-term financial contracts. Virtually, USDQ opens up new opportunities any time value is exchanged and volatility has a negative effect.
Bottom Line
USDQ has a high potential to democratise transactions between companies and individuals globally, bringing fast execution and low volatility. The "PLATINUM BLOCKCHAIN ENGINEERING" is working hard to enable and improve various features in order to help USDQ to take leading positions on crypto markets.
Here are the main ecosystem’s features:
The system uses two tokens (USDQ and Q DAO) in order to tackle volatility, while staying on the blockchain.
USDQ is always pegged to USD 1:1. In order to come into line with as many national exchanges as possible and enter other markets, the company will issue other tokens pegged to the national currencies. For example, there will be CNYQ (for Chinese Yuan), KRWQ (for South Korean Won), as well as JPYQ (for Japanese Yen) at the early stage.
USDQ brings higher decentralization, driving this important vector in the development of crypto industry.
Q DAO holders are interested in seeing the coin grow and succeed, thus they will work hard to review and pick the best proposals for the system to move forward.
Taking into account these beneficial features, there's no question that USDQ will become a viable alternative to other fiat-backed cryptocurrencies like TUSD, USDT, GUSD, USDC etc. Competing with other stablecoins, both already operating and just being developed, PLATINUM ENGINEERING will roll out the new features and underlying tech solutions that'll help propel the coin.
USDQ is decentralized stablecoin, which uses algorithms to offer higher stability and reliability. Fully on-chain and monitored by high-speed AI robots, ecosystem offers reliable defences against malicious acts and attacks. First run in line of fiat-pegs, USDQ is brought by PLATINUM ENGINEERING Team, looking to edge together innovative solutions in collateralization, using stabilizing mechanisms for high-endurance stablecoins. Soon there will be even more fully backed stable coins: JPYQ, KRWQ, SGDQ, HKDQ, CNYQ, RUBQ under USDQ brand. Fully anonymous, USDQ breaks limits out of this legacy world.
PLATINUM ENGINEERING values your opinion and welcomes you to continue the conversation on Telegram or Facebook, where the company’s development team is always ready to help you find solutions to pressing issues. Working on projects like USDQ, Michael has gained an invaluable suite of skills and insights, enabling to roll out high-usability UI/UX with tight deadlines and lack of clear expectations as to user behaviors. The team has successfully produced white-label wallets, stand-alone fundraising platforms, as well as integrated fundraising ecosystems. Any startup looking for a reliable partner to help execute a success-story will win from a free consultation with the PLATINUM ENGINEERING team about potential solutions to their needs and issues.
This overview may not be fully exhaustive and does not assess the viability of any project, nor its team legitimacy. Readers should conduct their own due diligence before using or investing in any of the listed Stablecoins. This article represents the author’s opinions only and should not be considered investment advice. All described functionality in the article is still under development, it can be changed/processed. Please follow the updates.
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Have you heard of Crypto Futures? Have you heard of Bitcoin Futures? You know CME Group’s adding them and this is positive news, but do you really know what derivatives are, how can you trade them, and where can you learn more about futures trading? Here’s your first part of Bitcoin Futures guide to get you started.
Bitcoin and other cryptocurrencies have evolved from a playful experiment among technical experts to an established and growing branch of the global financial industry. This means that the times in which cryptocurrency traders and investors only concerned themselves with straightforward buying and selling are over. Derivatives are now entering the picture.
Think of a derivative as a bet between two parties about the development of an underlying asset. These instruments are derived from the value of the underlying asset, having no value of their own. Hence the name “derivative.”
In traditional financial markets, derivatives are used as speculation objects as well as insurance against losses. T
The latter is known as hedging. One popular variety of derivatives used for hedging are called futures. A future is a contract between two parties in which one party agrees to pay the other a predetermined amount of money for an underlying asset at a specific point in time.
For example, let us assume that the underlying assets are pork bellies:
Trader A is a producer of pork bellies. In order to insure herself against a price drop in pork bellies in the future, she enters a futures contract with Trader B. Trader B uses these pork bellies to manufacture sliced breakfast bacon. Thus, he is not worried that prices might fall in the future – his worry is that prices will go up. Both traders agree that Trader A will sell a metric ton of pork bellies for 1,000 USD 3 months from now. This increases security for both of their businesses. Because a futures contract is a binding contract between two parties, neither party can drop out of the contract: Even if the price for pork bellies is 1,200 USD at the time of execution, trader A is still contractually obliged to sell for 1,000 USD.
Traders A and B in the previous example are hedgers. However, futures contracts, once they exist, can also be bought and sold in their own right. This is where futures get interesting for speculators. Say that Speculator X believes the price of a ton of pork belly will rise to 1,200 USD in 3 months’ time, so buying the futures contract at 1,000 USD is a good deal. He can then sell the contract to bacon producers who want to buy pork bellies at 1,000 USD. The option to buy at a specified price in the future is known as a call option. The price of call options rise when traders assume that the price of the underlying asset will rise.
However, Speculator Y may think that pork belly prices will drop to 800 USD per ton. For her, having the option of selling pork bellies for 1000 USD in the future is highly attractive. Such options to sell are known as put options. The price of put options rise when traders expect the prices to fall of an underlying asset.
The positions of Speculators X and Y are known as the long and short respectively: You assume a long position towards the underlying asset when you speculate the rising prices of an asset, and a short position when you speculate on falling prices (also known as “going long” and “going short”).
By now you may ask yourself, “If I think that the price of an asset is going to rise, why should I buy a call option and not the asset itself?” The answer is this: Options give you leverage. That means that with a limited amount of capital, you can profit much more by buying options than assets – but also lose much more. This is because a small difference in the price of the underlying asset immediately leads to a substantial change in the price of the derivative.
For example, when pork belly prices rise from 1,000 USD to 1,100 USD (an increase of 10%), call options for 1,000 USD suddenly become much more valuable – their prices may rise from 10.5 USD to 105 USD. Thus, if you have invested all of your capital in pork bellies, you will win 10% – if you have invested in pork belly call options, you will pocket a 1,000% profit.
These numbers are just approximate examples. The exact price of an option depends on the following factors:
The current price of the underlying asset.
The so-called intrinsic value of the option, which is simply the difference between the current market price of the asset and the predetermined price in the option (1100 USD – 1000 USD = 100 USD in this example).
The remaining time until the expiration of the option.
The volatility of the underlying asset.
As for why you should buy a put option instead of the asset itself, the answer is simple. By buying the asset itself, you can never profit from falling prices. With put options you can, simply because their value rises as the price of the underlying stock is falling. In addition to this feature, they offer the same kind of potential for leverage that calls options do, as described above. The price of put options is calculated in a similar manner, but with the important difference being that the intrinsic value is calculated as a predetermined price of the option minus the current market price of the asset – not the other way round as is the case for call options.
It is important to note, however, that leverage means that your potential losses may also be much higher. If pork belly prices fall, call options lose value in a much higher proportion than the pork bellies themselves. In the above example, if the price of pork bellies falls from 1,000 to 900 USD (by 10%), the price of call options may fall from 10.5 USD to almost zero, resulting in a near-total loss of your funds instead of a small loss of just 10%.
A Bitcoin futures contract is exactly what you would expect from the example above, replacing pork bellies with Bitcoin. It is a contract that enables you to buy Bitcoin at a predetermined price at a specific point in the future. For example, if today’s Bitcoin price is 8,000 USD per BTC and you expect it to rise to 10,000 USD per BTC in 4 weeks, then entering a contract which allows you to buy Bitcoin at 9,000 USD in 4 weeks is highly attractive.
Thus, Bitcoin futures are an up and coming class in the emerging crypto derivatives market.
Just like cryptocurrencies themselves, crypto derivatives have been adopted enthusiastically by the crypto community, and have been traded in an unregulated manner at first, and have even been used as a way to avoid the increasingly heavy regulation in the traditional financial sector.
And just like cryptocurrencies, they soon saw the first backlash from governments and authorities – take for example the Chinese cryptocurrency ban.
Crypto derivatives were naturally discovered as an interesting addition to cryptocurrency exchanges first – probably as individual contracts between interested investors on these exchanges. Nowadays, there are already a couple of exchanges that offer crypto derivatives trading as a standard feature: JEX is one of the current market leader, according to The Merkle News; others are BitMEX, OKEX, Crypto Facilities, Coinpit, and Deribit, as well as LedgerX (the first regulated cryptocurrency exchange in the US).
The most common way to trade in Bitcoin and other cryptocurrency derivatives today is through contract-for-difference (CFD) contracts. These CFD contracts are usually traded over the counter (OTC), meaning that they are not traded on exchanges but directly between participants. Due to the high volatility (exceeding 1.5-2x std from the mean) most of the OTC platforms do not provide leverage on bitcoin and other cryptos CFDs.
As described above, you can assume one of two positions in regards to trading in futures and other derivatives: Long and short. When you follow a long strategy, you speculate on prices of the underlying asset going up. With a short strategy, you speculate on prices going down.
If you are “going long” on Bitcoin, you assume that Bitcoin prices will go up. And if you expect Bitcoin prices to go up, you are interested in buying call options – options that enable you to buy Bitcoin at a predetermined price in the future.
For example, if the current Bitcoin price is 5,000 USD and you expect it to rise to 8,000 USD 6 months from now, you would certainly pay good money for a call option that allows you to purchase Bitcoin for 5000 USD in 6 months, when everyone else is buying for 8,000 USD.
In contrast, if you are “going short” on Bitcoin, you assume that Bitcoin prices will fall. Buying put options will enable you to sell Bitcoin at some point in the future at a price that is higher than the future price you expect.
In analogy to the example above, if the current Bitcoin price is 5,000 USD and you expect it to fall to 2,000 USD in 6 months, then put options allowing you to sell Bitcoin for 5,000 USD in 5 months (when everyone else is selling for 2000 USD) are very valuable.
In both of these examples, the options (call option in the first example, put option in the second) have an intrinsic value of 3,000 USD.
Going long is fairly straightforward. It is similar to buying the underlying asset itself, with the only difference being that it enables you to have more leverage.
Both call and put options have, as we have learned above, a certain expiration date. For example, my call option (Bitcoin for 5,000 USD) that I am buying on November 24, 2017, may have a running time of 6 months and thus expire on May 24, 2018. I can sell this option at any time between now and May 24, 2018. But what happens if I don’t sell?
Let’s assume that on the expiration date Bitcoin is worth 8,000 USD. Then my option is very valuable because it enables me to purchase Bitcoin significantly cheaper than the current market price. If this happens, the option is “in the money” – it is valuable.
If, however, Bitcoin is worth just 2,000 USD on May 24, 2018, then my call option for 5,000 USD is worthless. Nobody is interested in exercising this option and purchasing Bitcoin for 5,000 USD when the market price is only 2,000 USD. Thus, my option is “out of the money.”
So, one of two things can happen on the expiration date: If the option is “in the money,” I will receive its value in cash because CME Bitcoin futures are cash-settled. If the option is “out of the money,” it vanishes from my account without bringing me any profit.
However, if the price of the underlying asset is going down, your options usually become worthless before the expiration date. For example, if the Bitcoin price is already at 2,000 USD on May 17, then only the most extraordinary optimists (or “bullish” investors) would buy a 5,000 USD option that expires in just a week.
Everything discussed above is true for put options as well, except that their value development goes in the opposite direction. They become more valuable as the underlying asset price is falling.
A futures contract, as we have mentioned above, is a contract between two parties who agree to make a transaction of an underlying asset at a specified time in the future.
For example, you can enter a Bitcoin futures contract with Mortimer Duke saying that you will sell him 1 BTC on March 30, 2018, for the price of 5,000 USD per BTC. (In the actual CME futures contracts, the limit for one contract is 5 BTC, but we will stick with 1 BTC now for the purposes of easy explanation.) You enter into this contract on an exchange like CME.
Now, what if the Bitcoin price is rising? For example, if 1 BTC is worth 5,500 USD, you don’t want to fulfill this contract any more and sell cheap for 5,000 USD. In order to still make things fair for both participants, the exchange will make sure that you can sell for the current market price of 5,500 USD if you so wish, but they will compensate your contract partner for this. How? They will take the difference – 500 USD – out of your so-called margin account and give it to Mortimer.
This kind of settlement is not only performed on the fulfilment date of the futures contract, but on every trading day, according to the current price of the asset.
In order to make sure that you actually have money in your margin account to settle the difference with Mortimer every day, you are required to put up an initial margin at the beginning of the contract. A lower sum, the so-called minimum margin or maintenance margin, is also defined by the broker. If the money in your margin account falls from the initial margin to the maintenance margin, it triggers a margin call: The broker requests you to fill up your margin account to at least the initial margin (of course, you may also put up more).
However, if you don’t have the money to fill up the margin account upon margin call, you are in trouble: The broker then has the right to sell your assets (usually at a price that is more unfavourable than if you had waited for a good opportunity yourself). This is why margin calls should be avoided.
As you have known crypto futures very well from the contents above, you should find a place to try protical trading.
If you have a interesting in trading Bitcoin, Ethereum, EOS or other cryptocurrency futures in a professional exchange, JEX Exchange would be a good choice.
It’s the leading Bitcoin futures & options trading exchange in the world.
It's official website is as follows www.jex.com
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