What is a futures contract?

A futures contract is an agreement between a seller and a buyer to sell or purchase an asset at a specific time in the future at a predetermined price. It is a financial instrument that 'derives' its value from the price movement of the underlying asset. Futures trading takes place through exchanges.

The buyer of a futures contract takes an obligation to buy and get the underlying asset when the contract expires. The person who sells the futures contract takes an obligation to provide and deliver the underlying asset at the expiration date.

In simple words, it is a contract between two parties to exchange underlying security at a future date.

What are the types of futures?

There are different types of futures contracts depending on the underlying assets available for trading:

●       Equity market futures (Individual stock futures and Stock index futures)

●       Commodity futures (crude oil, corn, wheat, gas, gold, silver)

●       Currency and cryptocurrency futures

●       Bonds futures

How does it work?

Let's take wine manufacturers and farmers as an example. If wine producers hold a futures contract, they will buy the grapes at a lower price even if grape prices go higher on the spot market because of a bad crop. On the other hand, farmers who grow grapes are also protected if prices drop dramatically. For example, if there's a surplus caused by a crop, farmers will sell at a higher price provided by the futures contract.

If a wine manufacturer enters into a futures contract, it means that he agrees to buy 5 tons of grapes at a price of $500 on a particular date. In a way, the purpose of a futures contract is to fix the terms of a transaction now that will eventually happen in the future. Unlike an option, a person cannot opt-out of the agreement. On the required date, he will have to pay $500, and the farmer will have to deliver to him 5 tons of grapes.

What are futures contracts used for?

Beyond speculation, futures contracts can be used as a risk management tool and a way of reducing risks and profiting from falling prices.

What is Bitcoin futures?

Bitcoin futures are contracts between a buyer and a seller to buy or sell Bitcoin at a predetermined price in the future. The buyer makes money when the price of Bitcoin goes up, and the seller makes money when the price of Bitcoin goes down. That means that even in a bear market, you can profit by shorting (selling) Bitcoin futures. With this scheme, a person can profit from correctly betting that the price of BTC will go up (called long) or profit from correctly guessing that the price will go down (called short).

In short, BTC futures provide an investor a way to profit from both prices going up and down.

How do Bitcoin futures trading work?

To start trading, a trader needs to deposit money into a BTC futures exchange and use that as collateral to enter a contract. Profits or losses are realized when a futures contract is sold or expires.

What are the features of futures contracts?

●       Contract size. The contract size is how large each contract is. For instance, if a trader bought a hundred contracts, each of which was equivalent to $1, you'd have $100 in the market.

●       Long or short? Short contracts mean the balance will grow as BTC prices fall and fall as BTC prices grow, while long contracts mean the balance will grow when BTC prices grow and fall when BTC prices fall. It is possible to simultaneously have multiple contracts of different types that can offset each other.

●       Expiration date. This is the date when a contract automatically closes and settles up. A trader can sell his contracts at any time, but when there's an expiry date, the futures will close.

Besides, the futures contract allows traders to use leverage and requires less money to open positions. This is very capital efficient as traders can use a small amount of collateral to take on a sizeable position. For example, a 50x leverage, also known as a 2% margin trade, means that for every dollar traders stake in equity, they can trade $50.

Both spot and futures exchanges charge their clients small fees to carry out trading activities. Since exchanges face the risk of theft and hacking, it is wise not to trust a single exchange with all your crypto. The best way is to split and keep it on different exchanges.

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1. C-Trade offers up to 150x leverage on Bitcoin perpetual contracts.

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