Bitcoin futures opened on December 10, 2017, and it is the most significant milestone for Bitcoin. It has brought transparency, liquidity, and efficiency to the ecosystem. The evolving interest over the years in cryptocurrency markets added price discovery mechanisms and risk transfer capabilities.
What is a Bitcoin Exchange?
In the Bitcoin market, the volatility factor is a more significant concern amongst potential investors and traders. The market fluctuations have one important reason that is the lack of confidence in the Bitcoin system. Furthermore, it has to be accepted that the reputation is fragile, and the reaction to negative news is very high. However, the good thing is that the fluctuations have relaxed a bit.
In any investment market, the volatility takes away the attractiveness of the asset. A little swing here and there creates trading opportunities. It is the time when the traders and speculators take advantage and buy the digital currency and sell at a profit later on. The whole process of this ecosystem facilitates Bitcoin futures trading.
A Bitcoin exchange operates similarly to online stock trading brokers. Here the customers deposit their Bitcoins for trading purposes. Presently not all exchanges are offering these services. Most of the exchange operates like wallets with limited trading opportunities. Furthermore, the number of currencies supported by a particular exchange also varies.
Typically, the exchanges are done by matching the buy and sell orders on the system of the exchange. The process is precisely similar to buying stocks online, where you need to enter the desired price for buy/sell along with the quantity. The orders enter the order book and removed upon completion of the exchange transaction.
For buying Bitcoins, one needs to deposit funds in US Dollars or Euros or any other currency that the exchange supports. The conventional methods of transferring funds to the exchanges are through bank transfers, credit cards, or debit cards. It would be best if you had a digital wallet to hold Bitcoins. It is a prerequisite. For sellers, the currency for which the Bitcoins are sold needs to be withdrawn from the exchange. It is then sent to a bank.
Here an issue can arise. If the exchange has concerns regarding liquidity at some point, there can be delayed withdrawals and transfer of money into a bank account.
Again, some exchanges offer trading on margin. Whenever such an option is available, the Bitcoiners are allowed to borrow funds to carry out trades and manage the volumes. Here liquidity providers have a role to play. These are people who willingly deposit their Bitcoins and or dollars with the exchange for use for a pre-decided duration, amount, and rate.
Let us understand this with an example. Say an investor wishes to buy 25 Bitcoins with the expectation of price rise in the future. He hopes to earn profit by selling them at a higher price later on. If he is not having sufficient funds to buy 25 Bitcoins, the margin facility will let him borrow the amount required from a liquidity provider. Once the position is closed, he will repay the amount borrowed along with the interest of the given period.
One also needs to maintain what is called a maintenance margin in his trading account. It is to cover the losses, if any, during the trading. Once the account is depleted, a margin call is given to the account holder.
We all know that a futures contract is a technique to hedge positions to reduce risks of the market. In the case of Bitcoin futures, it is associated with Bitcoin miners who face the risk of unknown future prices.
In the Bitcoin Futures market, if the price is, for instance, $500 /BTC, an investor needs to buy 50 futures contracts, each worth $10. If the investor wants to open a positive position, then he goes with the “buy” contract, and just in case if he does not, he will open a negative position. He goes short with “sell” contracts. As an investor, the position can be positive or negative for the same instrument.
The bottom line is that a Bitcoin futures exchange charges a fee to its clients for conducting trading activities. Every exchange is prone to risks of theft and hacking. Therefore, it’s better not to trust a particular exchange with all your Bitcoin investments. The strategy is to split the total Bitcoin investment and put it in different places. With Bitcoin futures, offered at prominent marketplaces, all are to benefit. It acts as a facilitation center and broadens the Bitcoin trader’s outlook for prices and other relevant factors. With the launch of Bitcoin futures, will facilitate price discovery and price transparency, enable risk management. A kind of regulation comes in the whole process. It will further give a push to the acceptance of Bitcoin as an asset class. …