Bitcoin on the Spot
Whenever you buy or sell Bitcoin (and any other crypto), be it for the purpose of HODLING or occasional trading, you’re buying Bitcoin at spot on the spot, and every such transaction is settled immediately for physical bitcoins. Meaning you fully buy, sell, and own actual Bitcoins.
This is the most basic form of investing and participating in the cryptocurrency market. However, when simply buying and holding Bitcoin, you as a trader, only make a profit if its value increases.
In contrast, when trading Bitcoin futures contracts, you can earn a profit on both, the value of Bitcoin either increasing or falling by opening a long or short position, respectively. You also don’t need to actually own any Bitcoin to do so.
What are Bitcoin futures?
Bitcoin Futures saw its debut back in December 2017 when launched by the Chicago Board Options Exchange (Cboe). Since then, Bitcoin futures contracts have become one of the most traded crypto derivatives and are offered on major exchanges such as Binance, FTX, BitMex, and more. Fiat (mostly USD) and Bitcoin can be used as base currencies for their settlement.
Futures are contracts designed to ‘mirror’ the price of an underlying asset and that specify the purchase or sale of said asset at a predetermined price, on a specific date in the future. Essentially one makes a bet on the price either appreciating or depreciation. Futures typically expire on a quarterly basis.
When a futures contract is at expiry, all counterparties need to fulfill their promises. If the future price of Bitcoin is higher than an originally agreed price, the seller loses to the buyer and vice-versa.
Bitcoin Perpetual Futures
There are also perpetual Bitcoin contracts, and they operate as is implied by the term perpetual, without an expiration date. This means that you can keep a position open indefinitely, though it does of course involve paying interest. But, not having an expiry date means that if the price moves in the opposite direction of your short or long bet — you’re not instantly stuck in a losing trade. If your exchange account is well funded enough, you can keep a perpetual Bitcoin position open until the trade is in your favor.
Leverage trading.
Most modern cryptocurrency exchanges allow their traders to trade and open perp and futures positions with leverage, which is essentially borrowing funds (with fees involved) to buy an asset. This allows traders to take a position using only a fraction of their full account balance, or larger than their account balance, boosting their purchasing power and magnifying wins, and losses. Nonetheless, one has the potential to make a higher return using small initial capital, freeing up funds for other business. Some exchanges, such as Binance allow their traders to use up to 125x leverage. But, that’s risky, maybe even degenerate gambling-like.
Bitcoin futures and leverage trading remain high-stake games (with daily trade volumes between $10–40 billion across major cryptoexchanges). Combine them with the fact that cryptocurrency market operates and trades 24/7, and this adds another layer of complexity and maneuverability for traders.
Keeping up and being profitable in the current state of the cryptomarket can be a nervous and exhausting task. This is why we are developing Wavetrader, an AI-powered trading solution aimed to fully automate your trading experience. Let our AI do the trading for you while you simply enjoy the profits. Stay up to date with us via Telegram and Twitter.
