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What Are Futures?

Futures are financial derivative contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase, or the seller must sell the underlying asset at the set price, regardless of the current market price at the agreement’s expiration date. In crypto, the price of cryptocurrency is fixed to be sold at an exact time on a later date in the future with a legal binding or not.

Deeper Definition

In finance, a futures contract is a standardized legal agreement to buy or sell something at a predetermined price at a specified time in the future between parties not known to each other. The buyer of a contract is said to be the long position holder, and the selling party is the short position holder.

The first futures contracts were negotiated for agricultural commodities, and later futures contracts were negotiated for natural resources such as oil. Financial futures were introduced in 1972. In recent decades, currency futures, interest rate futures, stock market index futures, and cryptocurrency perpetual futures have played an increasingly large role in the overall futures markets. Even organ futures have been proposed to increase the supply of transplant organs.

Bitcoin futures enable investors to gain exposure to Bitcoin (BTCUSD) without holding the underlying cryptocurrency. They are similar to a futures contract for a commodity or stock index in that they allow investors to speculate on the future price of cryptocurrency. As with stock or commodities futures, bitcoin futures allow investors to speculate on the future price of Bitcoin. Investors can choose from a variety of venues to trade monthly bitcoin futures. Some are regulated; others are not. Bitcoin is known for its volatile price swings, which make investments in bitcoin futures risky.

Futures Example

Spencer, Smith, and Mark are friends; Spencer wants to trade his cryptocurrency, Mark is the only prospective buyer. He told Spencer he would be able to pay by the end of the following month, and he would buy if the price remains the same; they agreed with Smith being the third party. And when the time to transact came, the value of the bitcoin was the same, and the transaction went smoothly as planned.

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