Futures Contracts Are Not That Great

A lot of talk has been coming out around the Futures contract for Ethereum. There are countless Futures contracts already for Bitcoin and now Ethereum seems to be rolling out with a few as well.

This next futures contract is from Valkyrie.

Some might question this because the SEC has been so bent on attacking crypto so why would they be so eager to approve a Futures contract for Ethereum?

The short answer is because they don't directly touch the Ethereum asset and instead they act more as a bet and to the SEC some how minimizes risk.

What Is A Futures Contract

A Bitcoin futures contract is a financial agreement that allows traders to speculate on the future price of Bitcoin. It's a standardized contract between two parties to buy or sell a specific amount of Bitcoin at a predetermined price on a specific future date. This type of contract falls under the category of derivatives, which are financial instruments whose value is derived from an underlying asset, in this case, Bitcoin.

Here's how it works:

1. Parties Involved: There are two parties involved in a Bitcoin futures contract: the buyer (long position) and the seller (short position). The buyer agrees to purchase a certain amount of Bitcoin at a specified price on a set date, while the seller agrees to sell that Bitcoin at the same price on the same date.

2. Contract Specifications: The contract outlines the amount of Bitcoin being traded, the agreed-upon price (also known as the futures price), and the date of settlement, which is when the actual exchange of Bitcoin and payment occurs.

3. Speculation and Hedging: Traders often use Bitcoin futures contracts for speculative purposes. For instance, if a trader believes that the price of Bitcoin will rise in the future, they might enter into a futures contract to buy Bitcoin at a lower price now, hoping to profit from the price increase. On the other hand, if a trader expects the price to decrease, they might enter into a contract to sell Bitcoin at a higher price and then buy it back at a lower price later. Additionally, Bitcoin futures contracts can also be used for hedging purposes, allowing investors to mitigate potential losses due to price fluctuations.

4. Leverage and Margin: Many futures contracts are traded on margin, which means that traders only need to put down a fraction of the total contract value as collateral. This allows for leverage, magnifying potential gains but also increasing potential losses. Due to the volatility of Bitcoin's price, trading with leverage can be highly risky.

5. Settlement: Bitcoin futures contracts can be settled in two main ways: cash settlement and physical settlement. In a cash settlement, the difference between the contract's price and the actual market price of Bitcoin at the contract's expiration is settled in cash. In a physical settlement, the actual Bitcoin is exchanged between the parties at the agreed-upon price.

The Difference Between Futures and Spot

Based on the above we can see what a futures contract is. When you look at it it honestly feels like a really dumbed down version of an exchange but with predetermined dates as to when the buys and sells happen.

With a SPOT ETF however your buys and sells are at any given time and whatever the markets are currently priced in at for the underlying asset.

The other core difference is a Futures contract can have leverage on it while a spot ETF can not. The other big difference is unlike a futures a spot etf means you directly hold the underlying asset and this is the big thing that's holding the SEC back from allowing Spot ETFs as it would throw everything in their face in terms of wanting people to hold bitcoin and other cryptos.

Here's an older article I wrote on Spot ETFs Spot ETFs One Step Closer

While the differences between the two seem rather small (and trust me they are) the biggest reason why the SEC is not approving them is because it counteracts many of the things they have said.

What we are seeing however is businesses and people down right tired of shady practices and none movement from not only the SEC but also government itself and just going and doing what they want.

We have seen this taking shape with Elons X product and Paypals move to not only introduce their own stablecoin but also a hub for DeFi and other assets.

I wrote in more detail on these two major headliners as well which you can check out here.

Paypal is doubling down on crypto
CBDCs or everyones business getting in

Posted Using LeoFinance Alpha