Futures Contracts: Why are they good for Crypto

Cryptocurrencies are creating a new storm in the financial sector and all its credit goes to the increasing demand and supply of bitcoins and altcoins. The crypto industry witnessed a revolutionary change in the price of bitcoins – going from $1,500 to $20,000 – which was a sizeable increase of 1,333%. On the contrary, the market has also seen a reduction of 70% in Bitcoin price in just 3 months. To combat this situation, there is an option in the traditional market to make use of futures contracts for both commodity (corn, oil) and financial assets (such as stocks or currency). By following the same suit in December 2017, Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) disclosed that they are formulating an idea to bring in futures contracts in the cryptocurrency exchanges. Many researchers believe that white label crypto exchange software development companies should formulate the future contracts in their solutions to stabilize the cryptocurrency market.

So let us understand what this term means in a generic and technically, and how it can potentially benefit the cryptocurrency exchanges.

What are future contracts?

Future contracts are the agreements that bind both buyers and sellers to buy or sell a particular asset (in our case cryptocurrency) at a predetermined price and at a specified time in the future. These financial instruments are mostly used to hedge both the parties against risk. In this, both hedgers and speculators undertake their position to anticipate the future movements in the prices and thus articulate an agreement. Once the contract has been entered, both parties must perform the terms and conditions of the contract on the pre-defined prices. In futures, the goal of the parties is not to maximize the profits but instead, it is to minimize the risk involved.

Futures can be traded on various assets such as stocks, fiat currencies, treasury bonds, indexes or cryptocurrencies. The agreement is settled based on two things – physical settlement and cash settlements. For instance, the CME futures market uses cash-based future contracts where the trade is executed on the market price of the underlying asset that is cryptocurrency. This is done by the execution of technical and fundamental analysis of further insights on the futures contract market.

The main feature of future contracts is that they are performed on the expiry date. Therefore, many speculators or traders prefer to go to the open market before the expiration to buy or sell the contract. Thus the result is that the traders offset their positions by creating a similar profile or position of equal value and size. On the contrary, they may even roll over their position meaning that they extend their current position and this can be done by creating a new future position before the expiry of the earlier position. However, in some cases, they may even settle the contract on pre-defined prices

The role of bitcoin futures contracts is to bet on the prices of bitcoins and speculate on its future position. Thus it allows the investors or traders to make monies on cryptocurrency without even directly investing in them. This position leads to two most crucial conclusions;

• It propounds a sense of regulation in the otherwise unregulated market. It, therefore, reduces the chances of fraud in the transactions.
• It allows trading in areas where otherwise cryptocurrencies are banned. It enables the traders to speculate on the market trends and play along with them. It enhances the exposure to the market.

The current state of cryptocurrency exchanges

The current state of cryptocurrency exchanges is quite exhaustive. There are very minimal options available for the speculators or traders to speculate on cryptocurrencies. Present-day white label Bitcoin exchange software, whether centralized or decentralized, limit the use of future contracts due to their limited ability to provide these features. So there is an utmost need to develop the cryptocurrency future trading exchanges to trade bitcoin futures and these come with the following advantages:

• A futures contract allows the traders to hedge your risk position and provides you an ultimate exposure at the same time.
• It allows the traders to leverage their accounts through the use of a margin account.
• The nature of futures is liquid and it allows easy entry and exit position.
• Bitcoin futures are regulated by the Commodity Futures Trading Commission.
• The position of futures is reported by the Traders Report to maintain the transparency of transactions.

Key Takeaways

Future contracts are the righteous option to start with your cryptocurrency exchanges. A futures contract saves your position from high volatility and even provides you an adequate liquid position.

If you are planning to build your cryptocurrency exchange which is laced with all the recent and modern technicalities, we can help. We have the expertise to deliver a feature-rich, high-performance crypto futures exchange as per your business needs. Besides, we specialize in providing the best white label cryptocurrency exchange software underpinned by market-leading features for world-class security and performance.

View a free demo of our white label crypto exchange or connect with our experts to share your needs for a futures exchange.