On the day of the futures contract’s maturation, the miner sells their BTC on the spot market. If the mark price is lower than the contract’s forward price, the other party taking the long position will pay the difference to the miner. If the price of Bitcoin in the futures market (mark price) is higher than the contract’s forward price, the miner will have to pay the difference to the other party. When the futures contract matures, the miner will have to settle with the other party in the agreement. The futures contractĪ bitcoin miner can take a short position in a futures contract to protect their BTC holdings. The hedging process involves using both the futures market and spot market. Bitcoin miners have running costs just like farmers, and they rely on fetching a fair price for their products. While hedging may seem to be more useful in physical commodity markets, it does have a use in crypto too. Benefits of Trading Bitcoin Futures Hedging There are also multiple possibilities for arbitrage as well as sophisticated trading strategies. In a bear market, it’s possible to still make money by taking a short position. Long and short positions allow you to bet on the state of the market. Traders also use futures for speculation. Futures traditionally have been used as hedging instruments in the commodities markets where producers need stable profits to cover their costs. One major use case for Bitcoin futures is the opportunity for buyers and sellers to lock in future prices. You can settle contracts physically by exchanging the underlying asset or, more popularly, via cash settlements. The trader then purchases the asset at a later date to make a profit. A short position occurs when a trader sells an asset they’ve borrowed or own while expecting the price to drop. If the mark price is below the forward price at expiration, you will lose money and the short position profits. We’ll cover this in more detail later in the article. The mark price is an estimated fair value of an asset derived from its spot price and other variables. If you go long (agree to purchase) on a Bitcoin futures contract and the mark price is above the forward price on the expiration date, you will profit. To put it simply, you can agree to buy or sell a fixed amount of BTC for a specific price (the forward price) on a certain date. Although they are more challenging to use, futures provide ways to lock in prices with hedging and profit from downturns in the market with shorting.īitcoin futures are financial derivatives similar to traditional futures contracts. As a more complex product, they require a deeper understanding to trade safely and responsibly. Introductionīitcoin futures contracts are an alternative investment opportunity to simply holding coins and tokens. Cash-and-carry arbitrage and inter-exchange arbitrage offer some lower-risk trading opportunities when executed correctly. If you want to explore more advanced strategies with futures, take a look at arbitrage. Hedging is especially popular with miners who need to cover their operating costs.įutures are a great way to diversify your portfolio, trade on leverage, and bring some stability to your future income. Traders use them speculatively, but you can also use them to hedge. Two parties agree to buy or sell fixed amounts of bitcoin for a specific price on a certain date. Bitcoin futures contracts are a derivative product similar to traditional futures contracts.
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