Bitcoin Futures is an interesting and risky way to make more Bitcoin. The concept is by no means limited to cryptocurrencies and is nothing new but if one does not play your cards right, could turn dangerous very quickly. We take a look at what Bitcoin Futures entail and how you can grow your portfolio.
The long and short of Bitcoin Futures
The concept is pretty straightforward – buy low and sell high. For example, if one borrows one Bitcoin and sells it at a higher price than when it was borrowed. Let’s say you borrow a Bitcoin when it is worth $6,000 and sells it at $7,000. You made a profit of $1,000. Then you would have to wait for the price of Bitcoin to drop again to $6,000 to buy a Bitcoin and return it to your friend. This is a typical example of how Bitcoin Futures work. As you may gather from the example, there is a lot that could go wrong. What if the price of Bitcoin does not fall to $6,000 again and keeps going up?
If you borrow money or Bitcoin from someone, they expect something in return, usually in the form of interest. Even if you borrow Bitcoin from an exchange that allows margin trading, you will be charged interest as well as transaction fees. These margin accounts are quite specific in terms of term and rate payable for the loan. For example, Kraken charges a margin fee of .01% that is charged after every four hours the trade is open. Before going down this road, be sure you read and understand the terms of the exchange to avoid unexpected surprises.
If you can buy Bitcoin using your own funds, it becomes relatively easy. Once the price has increased and you want to take profits, you can sell your Bitcoin. Then you can either cash out or wait until the price falls again to buy again.
A Contract for Difference (CFD) is when you buy the change in the price of Bitcoin and not actually the Bitcoin itself. In other words, it is a derivative. At the end of the contract, you will receive a payment that would either be a negative or positive balance. Losses are subtracted from your initial capital and winnings are added.
A CFD also means that you look at the future price of Bitcoin and buy in on it. This is worked out over a specific time. Hence Bitcoin Futures is a big deal. Once again, Futures is not a new concept as it has been used in the agriculture industries for a long time. It is also referred to as a “spot” price which enables a farmer to sell his produce at a specific price. This is a fixed price. The actual market price for the specific product might in actual fact be higher or less than this fixed price. The farmer can either score or lose. These Futures contracts have an expiry date which may be anything from a week to a couple of months. Did you know that you can also sell your Futures contract before it expires? This is an added benefit.
Getting involved in Bitcoin Futures will require a great deal of technical and chart analysis from the investors’ side. One must also be aware of the risks associated with this. Whether you are into Futures, a CFD or borrowing Bitcoin from an exchange, there is risk involved. Losses can be greater than profits since profits are linked to the current market price.
In conclusion, Bitmart Senior Trade Analyst Rudner de Witt warns that Futures trading is very high risk.
“Start with a small amount and make sure you understand the platform. Cryptocurrency Future trading differs greatly from the Forex equivalent.”
If you would like to learn more about Forex trading, don’t miss the Bitmart Forex Trading Seminar presented by Rudner de Witt. For more info, click here.