Bitcoin futures have a fairly maligned reputation within the cryptocurrency industry. These divisive instruments have been held liable for bringing equal measures of ruin and legitimacy to the ecosystem. While some remain opposed due to the haphazard way in which these derivatives came onto the scene, crypto futures may prove beneficial for the crypto space; in fact, they might actually be a better trading instrument than BTC itself.
In essence, a futures contract — as its name suggests — is an arrangement between two parties to buy or sell an underlying asset, such as bitcoin, at a pre-agreed price, at a pre-determined point in the future.
The concept of futures trading has existed within the traditional financial markets for over a century. These derivatives have become an established instrument for hedging underlying assets and controlling volatility risks.
Price fluctuations are typical within any market; fortunately, futures allow both sides to mitigate losses arising from these variations by setting an agreed price for buying and selling goods. Furthermore, as volatility is a veritable trademark of the crypto markets, futures have become a popular way for many traders — as well as miners — to manage risk.
Bitcoin Futures: A Rocky Start
While a few exchanges have dabbled with futures-esque offerings, today's prevalence with these derivatives arose primarily from the entry of the Chicago Board Options Exchange (Cboe) and the Chicago Mercantile Exchange (CME).
At the end of 2017, after a prolonged 2-year bear market, these two famed and regulated exchanges elected to list BTC as a futures contract. The fervor around this sudden adoption was not underplayed. A new air of legitimacy formed around bitcoin, and conversation of institutional involvement was rife within the community. Almost immediately, the promise of fresh liquidity was realized, and bitcoin flew up in price — resulting in the infamous 2017 bull run. Nevertheless, the hype was short-lived, and after that, the market stagnated into yet another crypto winter.
In the end, it seemed institutional investors weren't quite as enthusiastic as retail, quickly turning bearish amid a somewhat unsubstantiated parabolic run, consequently driving a wedge between the two.
Regardless, in recent times — and notably following bitcoin's quasi-reprisal earlier this year — crypto futures have hit their stride. Retail investors are once again on-board, and the popularity of crypto derivatives have skyrocketed. According to data relayed from 13 top crypto exchanges, futures trading now cites around 50% of spot trading and is responsible for reducing, volatility, and increasing liquidity in the underlying market.
Bitcoin vs. Bitcoin Futures
Bitcoin futures have afforded a myriad of benefits to the underlying market. However, alongside expanding the investor demographic, and easing regulatory anxieties, for traders bitcoin futures may be more fruitful than buying bitcoin outright.
Minimized Risk of Manipulation
Unlike buying bitcoin on exchanges, futures markets set an equitable value for the underlying asset; this is known as the mark price. Typically calculated based on an index of prices across multiple exchanges, the mark price ensures against unjust liquidations that may occur from instances of market manipulation.
Similarly, futures platforms such as OKEx often employ margin systems. Within OKEx's derivatives offerings, a Tiered Maintenance Margin Ratio (TMMR) system dictates the collateral needed for exercising leverage. Further, it can act as a way of deleveraging traders, minimizing the shock of large liquidations.
OKEx also levies a system called "Forced Partial Liquidation Mode" to protect the underlying market from slippage caused by liquidation.
No Need to Store or Transfer Crypto
One of the biggest barriers to entry into crypto remains its complexity. The notion of digital wallets, cold storage, and public and private keys, is often too convoluted for newcomers to comprehend. These issues are negated with futures contracts that work in much the same way as their traditional counterparts—providing a clean cross over for experienced financial traders.
Better yet, futures contracts can't go missing, get hacked, or be stolen. Unlike the plethora of crypto heists and hack horror stories and rising fraud figures, crypto derivatives are more or less impervious to corruption.
On OKEx, derivative contracts are settled in USDT, meaning that when it comes time to cash out, traders can do so using a stabilized and versatile currency.
Many exchanges, including OKEx, allow for perpetual contracts or swaps. At their core, these are futures contracts with no expiration date. This means that the contract or swap can stay open continuously—providing the trader is able to fund the position.
This allows the same advantages as buying the underlying asset outright, only with the added benefits provided from futures contracts.
OKEx's perpetual swaps offer a significant assortment of cryptocurrency pairs that other markets tend to lack. These include BTC, EOS, ETC, ETH, LTC, BCH, BSV, TRX, and XRP. Each pair is applicable for leverage ranging from 0.01 to 100x, with settlements made daily.
Lower Fees Than Trading
Often, fees arising from day trading can amount to significant figures. Even if it's just a one-off barter, charges associated with buying cryptocurrencies are usually much higher than when opening a futures position.
For example, across many of the top exchanges, trading fees range from 0.1% to 1.49%. By contrast, futures taker's fees run from a comparatively lower 0.02% to 0.5%. Keeping up with the OKEx example, it boasts some of the lowest costs for derivatives trading, citing a 0.03% taker fee for futures, and 0.05% for perpetual swaps.
Making Money in a Bear Market
One major bonus with futures contracts is the ability to short the underlying asset. It's no secret that bitcoin and other cryptocurrencies regularly go through bull and bear cycles.
Unlike buying bitcoin itself, futures contracts allow traders to easily short if they feel the market is close to tanking.
In essence, future contracts allow for a range of faculties otherwise unavailable via traditional trading, producing an extremely versatile and exciting instrument for speculation.
Featured image via Unsplash.