What is Futures Contract? | CryptoWallet.com

What is Futures Contract?

A futures contract is a legal agreement where one party promises to buy an asset at a fixed price on a certain date and time in the future. When you buy a futures contract, you do not own the underlying cryptocurrency. Rather, you own a contract with an agreement to buy or sell the underlying cryptocurrency at a future date. 

Future contracts are normally used by traders as a way to hedge their investments or to lock in profits when trading in unstable markets. However, owning a cryptocurrency futures contract does not reward you with other benefits like voting and staking.

Shorting Crypto

Investors who are holding digital assets can reduce the risk of a falling asset price by taking a “short” future position on the particular asset. If the price falls, the “short” position will hedge losses by providing additional profit.

With futures contracts, traders can make their opinions known in the market by trading futures “long” or “short” positions. If you think the price of Bitcoin is going to the moon, you can enter a long futures position and multiply your returns. If you think it’s going to dip, you can take advantage of it as well. Your profit or loss will depend on the outcome of your prediction.

How Do Crypto Futures Work?

Most digital assets experience high volatility and negative publicity which results in frequent loss for some traders. Even at this, some traders have been able to take advantage of this price volatility through trading futures contracts.

One crucial thing to note in crypto futures trading is that you only take risks on the asset price changes without holding the actual cryptocurrency.

Look at this scenario: Assume that Mark and Ann entered a Bitcoin futures position at $50,000 each. Then  Mark decides to go for a long position while Ann takes a short position. Upon expiration, the Bitcoin futures price settled at $55,000 for each contract. In this case, Ann, who is holding a losing position, will have to pay the exchange the deficit loss ($55,000-$50,000 = $5,000). Mark, on the other hand, will receive a profit of $5,000 from the exchange on the trade.Futures Contract