Futures Contract Definition
In the context of cryptocurrency and blockchain, a futures contract is an agreement to buy or sell a specific cryptocurrency at a predetermined price at a specified time in the future. The purpose of this agreement is to mitigate the risk associated with price volatility in the cryptocurrency market.
Futures Contract Key Points
- It is essentially an agreement between two parties to buy or sell cryptocurrency at a set price, at a specified date.
- Futures contracts are often used as a hedging instrument to manage price risk people face.
- These contracts can be traded on regulated cryptocurrency exchanges.
- Parties involved in futures contracts are obligated to fulfill the contract on the specified date.
What are Futures Contracts?
A futures contract, in the terms of cryptocurrencies, is a legal agreement between two parties to trade a specific amount of a cryptocurrency at a predetermined price at a certain point in the future. These contracts are standardized for quantity and quality of the asset to facilitate trading on a futures exchange. Futures contracts can be used for hedging or speculation purposes.
Who Uses Futures Contracts?
Futures contracts are mainly used by two categories of market participants: hedgers and speculators. Hedgers use futures contracts to reduce the risk associated with the price of an asset, in this case, a cryptocurrency. On the other side, speculators typically assume price risk that hedgers are trying to avoid and bet on future price movements, in the hope of making a profit from favorable fluctuations in price.
When are Futures Contracts Used?
Futures contracts are used when parties aim to secure a future transaction. They allow both parties to know exactly what the price will be and can help guard against the risk of a price swing. This can be particular valuable in the cryptocurrency market, where price changes can be unpredictable and extreme.
Where are Futures Contracts Traded?
Futures contracts can be traded on regulated cryptocurrency exchanges. The biggest regulated exchange that trades futures contracts is the Chicago Mercantile Exchange (CME), which started offering Bitcoin futures trading in 2017.
Why are Futures Contracts Important in Cryptocurrency?
Futures contracts in cryptocurrency are important for a few reasons. Firstly, they provide some stability in the often volatile crypto market by locking in a set price for the future, making prices more predictable. Secondly, they provide an opportunity for investors to speculate on price changes, providing potential avenues for profit. Lastly, they help in the process of price discovery, where the future price of a cryptocurrency is determined based on supply and demand conditions.
How do Futures Contracts Work?
A future contract works by setting a fixed price and date for the trade of a certain cryptocurrency. For example, if a buyer and a seller agree on a futures contract for Bitcoin at $10,000 in one month’s time, the buyer is promising to buy Bitcoin at that price, and the seller is promising to sell it at that price, regardless of the actual market price at the agreed execution date.
