Financial education: Bitcoin futures

Learn more about this financial trend

Financial education: Bitcoin futures

Leer en Español: Educación financiera: futuros y Bitcoin

2017’s favorite investment trend is Bitcoin. The cryptocurrency started out with a unitary valuation under $1,000 USD which has six folded since then. International pressure from top financial authorities, such as JP Morgan’s CEO Jamie Dimon and Chinese president Xi Jinping, have failed to halt the growing demand for the digital currency.

This week, the Chicago Mercantile Exchange, the world’s largest trading market announced the launching of Bitcoin futures by the end of the year, if regulators agree. Although the fate of the currency remains at stake, it’s highly recommended to follow its trail closely as safer ways to invest surface everyday.

What is Bitcoin?

Bitcoin is a digital currency that is not related to Central Banks, meaning it’s decentralized. Due to the fact it exists in the digital realm only, it is dubbed as a crypto-currency. Bitcoins are stored in digital wallets and can be transferred throughout the world via the Internet using a digital signature secured with a Blockchain verification system.

Read Also: What is blockchain and why does it matter

There are two ways to obtain a Bitcoin, either buying it or producing it. Bitcoins are granted through the usage of special software that solves math problems in exchange for coins, creating an incentive for more people to mine. The more people mine, the harder it gets to obtain Bitcoins. The price for a coin reflects the average energy used to mine it.

What are futures?

Future Contracts are a type of Financial Derivative; its price depends upon one or more underlying asset. The most famous financial derivatives include futures, forwards, and swaps.

A Future Contract is an agreement between a holder of an asset, whose price may vary in time, and an investor in order to set an agreement to buy or sell the given asset for a fixed price in the future. Producers use futures to hedge the risk of market volatility.

A Bitcoin future would allow an investor to sign a contract that will obligate him to buy a Bitcoin for a fixed price in the future, which can generate substantial returns if the pledged price was placed below the actual market price in the moment of the deal’s closure. In the same way, a contract for selling a Bitcoin at a given price and time can be created.

Read Also: Is it a good idea to invest in Bitcoin?

Bitcoin exists as it has a market price and it’s allowed in various establishments. Nevertheless, it’s not a legal tender worldwide and its regulation has not been clearly established. If the CME allows Bitcoins to be traded then renewed legitimacy will rest upon the currency.

 

Latin American Post | David Eduardo Rodríguez Acevedo

Copy edited by Susana Cicchetto

 

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