What is a futures contract in simple terms and how does it work. Many of us have heard this word, read what it is, but have not figured out this concept. Therefore, catch a small educational program – what is it and do you need it?
Crypto Futures is
Crypto Futures is a contract of deferred sale, which specifies the price and date of execution of the contract. When this day comes, the buyer is obliged to redeem the subject of the contract (goods, shares, etc.), and the seller must give it back.
A simple example. A year later you are moving to another country, but you do not want to delay the sale of the apartment until the last moment. Find a buyer who will agree to buy your property in a year for 70 thousand dollars. Enter into a futures contract.
The price is fixed! And this means that in a year you will either win (if real estate prices are ↘️) or lose (if they are ↗️).
Cryptocurrency Futures are:
- Deliverable – when the asset is delivered to the buyer physically.
- Settlement – when there is no sale as such, but the difference between the futures price and the actual value of the asset is paid.
95% of futures are settled on the exchanges. Nobody carries kilograms of gold and sells indices. The participants in the contract are making a “bet” on how the actual price will change.
How are futures traded?
Let’s explain again with an example:
- John believes that oil will rise in price. Peter is confident that the price of oil will fall. So he doesn’t mind “selling” fuel to John at the current price ($50).
- According to the contract, John undertakes to “buy” 100 bbl from Peter for $5000 in a week. At the same time, the exchange blocks the amount for collateral (up to 15%) on the participants’ accounts.
- As a result, oil becomes cheaper and costs $45. “Buyer” John loses $500, and “seller” Peter gets that amount, even without fuel to sell.
❗️ I strongly discourage beginners from using futures. And that’s why:
Settlement (clearing) is carried out not at the end of the term of the futures contract, but EVERY day. That is, if tomorrow the price of oil falls by 1%, then $50 from Vanya’s account will be transferred to Petya’s account. The exchange sets the margin after clearing and can increase it, which will lead to a margin call for inexperienced traders.
Therefore, stocks, bonds and funds will be enough for you if you invest “for yourself”.
Disclaimer: This news is not investment advice. Assess the risks yourself before making any investment decisions.
Join my telegram channel.
All portfolio leaders are here.