Understanding Crypto Futures Contracts
Date: 2023-12-25 Author: Dima Zakharov Categories: BLOCKCHAIN
What Are Crypto Futures Contracts?
Futures contracts are financial derivatives, representing an agreement between a buyer and a seller regarding the price of an underlying asset and its future delivery date. In essence, this financial instrument, known as a "future," is all about anticipating what lies ahead.
The underlying asset for a futures contract can be virtually anything: commodities, stocks, currency pairs, and, in our context, cryptocurrencies like Bitcoin, Ethereum, Solana, and others.
Why Do We Need Derivatives When We Have Cryptocurrencies?
In any trade, you need two parties: a buyer and a seller. Let's consider two crypto investors, Evgeny and Oleg. Evgeny wants to buy ten Bitcoin futures contracts, while Oleg wants to sell. When their desires align, a transaction can take place. So far, nothing out of the ordinary.
What's more intriguing is how much money our heroes need for this. Suppose the price of one futures contract is $40,000. Consequently, the ten futures contracts in our example would be valued at $400,000. However, the beauty of futures is that you don't have to pay the full amount upfront; you can settle for a fraction known as "margin." Exchanges may allow trading with 20% or 50% of the funds in your account. In our case, Evgeny and Oleg would need $80,000 or $200,000, respectively, in their accounts. The margin requirement varies from exchange to exchange.
It's crucial to note that futures contracts are standardized. Their terms and conditions are clearly defined. Nevertheless, crypto futures can differ from one exchange to another.
Where Can You Trade Crypto Futures?
You can trade crypto futures on both regulated exchanges and unregulated cryptocurrency platforms. Regulated exchanges include the Chicago Mercantile Exchange (CME) and the Chicago Options Exchange (CBOE) in the United States. The unregulated category comprises the most famous crypto exchanges such as Binance, Bybit, OKX, and many more.
CME is renowned as the leading platform for trading crypto futures, boasting the largest open interest (the number of outstanding futures and options contracts) in Bitcoin.
