Bitcoin Futures: Shorting & Longing vs Hedging

Bitcoin futures trading has quite a number of advantages over Bitcoin spot trading. These advantages come from the way the Bitcoin futures contracts are traded. There are three commonly used trading methods in Bitcoin futures trading. These methods are shorting, longing and hedging.

Normally, exchanges that offer Bitcoin spot trading require traders to deposit some Bitcoins to start trading. However, for Bitcoin futures trading, traders are not required to own any Bitcoins unless they choose to use physical settlements.

This is placing a short bet on the underlying asset, which in the case of Bitcoin futures is Bitcoin. A short bet simply means that the trader enters into a contract to sell Bitcoins worth a certain amount at a certain time in the future, hoping that the price of Bitcoins at that time will have depreciated.

Shorting Bitcoin futures is much easier and profitable than shorting Bitcoin in the spot market since it is very difficult to carry out technical analysis on Bitcoin due to its volatility.

This is placing a long bet on the underlying asset, which in the case of Bitcoin futures is Bitcoin. A long bet in Bitcoin futures contracts simply means that the trader enters into a contract to buy Bitcoins worth a certain amount at a certain time in the future, hoping that the price of Bitcoins at that time will have dropped.

Longing Bitcoin futures is much easier and profitable than longing Bitcoin in the spot market since it is very difficult to carry out technical analysis on Bitcoin due to its volatility.

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Hedging Bitcoin & Bitcoin Futures

Hedging is one of the most appreciated advantages of Bitcoin futures contracts.

Contrary to most cryptocurrencies especially the altcoins being developed recently, new Bitcoins are added into the Bitcoin ecosystem through mining. Previously, before Bitcoin futures contracts were introduced, Bitcoin miners could mine new Bitcoin only for the Bitcoin prices to drop sharply when the new Bitcoins become available to the market.

Futures contracts have given Bitcoin miners the advantage of hedging against the sharp market price falls. If the Bitcoin miner starts to mine NEW Bitcoins, he or she can enter into a Bitcoin futures contract to sell the newly mined Bitcoin at the current market prices. Therefore, even if the market price of Bitcoin falls, the miner still sells his or her Bitcoins at the price agreed upon in the futures contract.

However, if the price of Bitcoin rises, the miner will have missed the chance of making profits.