New cryptocurrency-related products are being launched by companies. So, what are they?
Last month, a spokesperson for Citigroup Inc said that the bank is considering offering bitcoin futures trading for some institutional clients. The spokesperson said that the bank’s clients are increasingly interested in this space, and they are monitoring these developments. The spokesperson added that they are being very thoughtful about their approach due to the many questions around regulatory frameworks, supervisory expectations, and other factors.
Firstly, What Is A Futures Contract?
A futures contract is an agreement between a buyer and a seller. Let’s assume that you own a surgical glove manufacturing company, and you are worried that the price of rubber, the key ingredient in the manufacturing of gloves, might increase in the future.
So, you (the buyer) enter into a contract with the people who manufacture rubber (the seller), saying that you will buy 1000 kg of rubber in November at a price of ₹110 per kg. This way, you don’t have to worry about the prices of rubber going up in the future, while the rubber manufacturer doesn’t have to worry about the prices going down.
You might start thinking that futures contracts are not your thing because you neither own a glove manufacturing company nor need 1000 kg of raw rubber. But the truth is, futures contracts don’t have to involve the actual delivery of a physical good.
So, What Are Bitcoin Futures?
With Bitcoin futures, the contract will be based on the price of Bitcoin, and speculators can place a “bet” on what they believe the price of Bitcoin will be in the future. It also allows investors to speculate on the price of Bitcoin without actually having to own Bitcoin.
This helps investors in two ways: Firstly, while Bitcoin itself remains unregulated, Bitcoin futures can be traded on regulated exchanges. Secondly, in areas where trading Bitcoin is banned, Bitcoin futures allow investors to still speculate on the price of Bitcoin.
Pros & Cons
Bitcoin futures might sound like a great idea, as it helps you reap the benefits of Bitcoin, without actually buying Bitcoin. However, if you speculate at the wrong time, you could be left stranded with a future asset that just isn’t worth it.
Even though Bitcoin futures are speculative, it is possible to leverage good information on the best effort basis. If you are able to time it right, there might be a major profit for them by leveraging the Bitcoin futures market. On the other hand, it is not exactly easy, and Bitcoin futures are not very accessible for the average person.
The cryptocurrencies market is growing, and Bitcoin is a large portion of it. Bitcoin futures offer investors with transparency, price discovery, and risk management capabilities. The contract will also allow individual market participants to access the bitcoin market, and hedge any direct exposure to bitcoin pricing.
But, generally, the futures are a better option for seasoned Bitcoin traders. Traders could lose a lot of money, as they could be forced to buy Bitcoin way above its current trading price. Like every other cryptocurrency, Bitcoin is highly volatile, and very risky. So, futures might be a fun concept, but newbie traders should be careful while investing in these risky assets.