When bitcoin entered the marketplace, no one was familiar with its existence, and those who knew about bitcoin were having very uncertain thoughts about it. One of the primary reasons behind this fact is that bitcoin had a completely decentralized network. Bitcoin futures are currently trading on many trustable exchanges. Therefore, you can make a considerable profit from bitcoin futures without holding the currency. In addition, government authorities were highly concerned about the risks of cryptocurrencies.
However, bitcoin has shown commendable growth over the passing decades, and the cryptocurrency market has been evolving since then. These digital currencies’ market value and returns entice more and more people to invest resources. You can trade bitcoin on websites like BitQT. However, since bitcoin is devoid of regulations by higher authorities, no financial organizations can expedite cryptocurrency transactions.
The cryptocurrency market has evolved to an exceeding extent as you can correspondingly trade bitcoin futures contracts. Exchanges launched the concept of bitcoin contracts in 2017, just before the cryptocurrency market crash. These bitcoin futures contracts have acquired gigantic traction over the past few years.
With the help of bitcoin futures contracts, you can earn money without even holding the important cryptocurrency. Undeniably, there are some risks attached with these bitcoin futures contracts, but these contracts’ profit potential is immense. Here is everything you should know about the bitcoin futures contracts.
Understanding bitcoin futures!
To understand bitcoin futures contracts, you first need to know about the basics of these contracts. Chicago Mercantile Exchange is the platform that allows you to trade these bitcoin futures contracts. The CME gives a contract each month to perform the settlement of cash. In addition, there are several brokers that can help you trade bitcoin futures contracts.
Chicago Mercantile Exchange renews these bitcoin futures contracts subsequently every 30 days. A single contract lasts for almost half a year. So you can blaze the trail of your trading journey when the initial price of the contract is set. After trading contracts for some time, the supply and demand factor comes into play to influence the value of these contracts.
I was calculating the price of bitcoin futures!
The value of future contracts is majorly characterized based on the underlying security. More market valuation of these contracts also depends upon explicit tokens on spot value. Some formulas can help you calculate the price of a bitcoin future contract.
You can calculate the available future price using the Futures Price=Spot price ∗(1+rf−d). Rf in this formula stands for the risk-free rate, and d stands for the dividends. The formula for calculating the future is derived from the core notion of the cost of carrying. Let’s find out what the cost of carrying is.
The cost of carrying
We all are familiar that secure bonds are one of the safest traditional investments. Therefore, the individual investing resources in bitcoin futures can diversify their portfolio by investing in secure bonds.
The advantage of investing in these secure bonds is that they offer a risk-free rate of return. However, in case an investor does not acquire the opportunity of arbitrage trading, the market value of bitcoin futures is the addition of cost of carrying and spot price.
Price differences
As mentioned ahead, future contracts follow the trail of currency’s spot price; you might think about why price differences happen. The theoretical formula only helps us calculate the future contract price without arbitrage trading. However, in real life, factors like volatility and arbitrage trading impact the future contract price by an exceeding extent.
One of the primary reasons behind this is that investors consider all the possibilities due to price volatility. You can trade bitcoin units any time in a day that means the market value of bitcoin is subjected to extreme volatility. On the other hand, bitcoin trades are open for only a particular time.
There is a possibility that future market value might lie near the spot price. Still, if the spot price of bitcoin experienced a considerable incline, the difference between bitcoin futures will increase by an exceeding extent.
Conclusion
Factors like massive changes in volatility influence the bitcoin future contract by an exceeding extent. So future trading is undeniably a high-stakes job but is still a bit volatile and risky.