A Futures contract is basically an agreement between two parties to buy or sell an asset at a predetermined price in the future with an intermediary involved i.e., the futures exchange. These are standardized contracts where everything is predetermined, like the expiration date, lot size, margin etc. Every futures contract is time-bound and has an expiration date, which is the date after which the contract ceases to exist.
Let’s consider a simple example, let there be two individuals
Alice and Bob, and Bob wants to sell some amount of silver at.
Assume price of silver currently to be $100/kg. ‘A ‘is a buyer,
and is willing to buy silver. Alice predicts that the price of
silver will increase so wants to buy and keep the silver, while
Bob thinks that the price of silver will reduce in future and
thus wants to sell the silver as soon as possible. Therefore
Alice is a perfect customer for Bob. Now instead of buying /
selling the good at present what Alice and Bob do is that they
enter an agreement, which says that Alice will buy silver 1 month
in future but at present rate. This aligns with Alice and Bob’s
intentions as Alice wants to minimize the buying price for future
trade and Bob want’s to maximize future profit. Tough only one of
the following 3 scenarios will occur:
Now Alice and Bob were fortunate to find each other, in real life scenario it is very difficult to find some individual who is ready to enter a contract like Alice and Bob. Here comes in the role of Futures Brokers / Exchanges. The job of exchanges is to find an individual or a party ready to enter a contract for buying/ selling an asset/ share/ currency at some time in future. For this the exchanges charge a brokerage fee
Futures are a bit different than the contract that Alice and Bob agreed to. Futures are much more defined, the lot size, contract value, margin and expiry date are strictly defined. Also one can dissolve or sell the contract before the expiry date if one is no longer in align with their previous predictions.
Futures contract takes the "future price" of the asset into consideration. The future price mimics the underlying assets, hence any change in the underlying asset causes a change in the futures contract. Therefore, whenever the price of the underlying asset goes down the price of the futures contract goes down, and likewise, if the price goes up the futures contract's price goes up.
Bitcoin futures opened for trading on the CBOE futures exchanges
on December 10, 2017. This was the first U.S. Bitcoin futures
exchange. After that on December 17, 2017, CME Group also
launched Bitcoin futures.
CBOE Bitcoin Futures: These are U.S. dollar-denominated, cash-settled contracts. XBT futures are based on the auction price of the Gemini Exchange.
CME Bitcoin Futures: These are also U.S. Dollar denominated cash-settled contracts. The contracts are settled based on the CME CF Bitcoin Reference Rate (BRR) and is 5 times the BRR value in USD. BRR serves as a once-a-day reference rate of U.S. Dollar price of Bitcoin, every tick is worth $5 for BRR. i.e. $25 ticks for CME Bitcoin Futures.
To track the Bitcoin Futures across exchanges, with Contango and data summary visit Cryptoz.ai.