The two most common types of financial instruments in the world are derivatives and futures. Bitcoin ETFs and futures are derivative products in the trading world that have recently gained a lot of air-time. Read more about interesting crypto news and know how to buy cryptocurrencies.
Bitcoin is a digital asset that has seen great success in monetary usage; however, there is still much to learn about this type of product. Although there is still much debate about what bitcoin will become long-term, current bitcoin ETFs and futures contracts offer investors an opportunity for increased exposure to the cryptocurrency asset class.
The difference between these two instruments is far more significant than their names or where users can use them. Bitcoin futures contracts have higher accuracy, transparency, and liquidity than bitcoin ETFs. Futures are derivatives that use cash market prices to derive an underlying asset price (e.g., a stock index, commodity, or currency).
The standard futures contract traded worldwide is the most well-known among these instruments. A futures contract is usually a standardized contract that obligates the holder to buy or sell a specific asset (e.g., gold, crude oil) at a predetermined future date at an agreed-upon price with an exchange or clearing house acting as guarantor. Let’s discuss the differences between bitcoin futures and bitcoin ETFs in detail.
What are bitcoin futures?
Futures are negotiated transaction between two parties that allows two or more parties to exchange an asset at a future date for an agreed-upon price. They are similar to forwarding contracts in that the buyer pays for a specific product or service with certain aspects of the transaction known before and agreed upon at the execution time.
Futures contracts have many potential uses, including pricing and hedging, speculating on price movements, and facilitating business-to-business transactions. Futures contracts are used extensively in financial markets as they provide risk management tools, enabling greater flexibility regarding specifications, volume limits, and delivery dates.
Specifying a specific quantity, contract size, or delivery date is valid when managing risk and anticipating demand. For example, a company that needs to purchase raw materials in six months for a manufacturing project can use futures contracts to secure the price at which it will buy the material. It protects against price fluctuations in the market before it purchases the material and fulfills its need.
Futures have apparent benefits when applied to bitcoin and other cryptocurrencies as they provide liquidity and ease of entry into an asset class still in its infancy. Bitcoin futures are traded on exchanges, such as CME, CBOE, and others worldwide. These exchanges guarantee a certain amount of liquidity on any given day, meaning you can buy or sell your contract without moving the market too much. The rise of futures has been widely attributed to increased asset price speculation, attracting institutional investors to launch bitcoin-based hedge funds. In addition, new futures exchanges have cropped up worldwide, which have become magnets for bitcoin trading.
What are Bitcoin ETFs?
Bitcoin ETFs are similar to mutual funds in that they are traded on stock exchanges, each share represents a piece of the total bitcoin market, and they track a benchmark index like the S&P 500 (SPX). The significant difference is that ETFs trade like stocks on an exchange, meaning that they can be shorted by traders or purchased on margin. In addition, ETFs are traded like any other stock on an exchange and can be bought and sold by individuals and institutions.
Bitcoin ETFs give institutional investors access to the cryptocurrency market by allowing large financial institutions to invest in Bitcoin without owning it. Instead, they track well-known and highly liquid cryptocurrencies, and their price movements can be easily tracked by people using popular trading tools such as GDAX or Bitfinex.
Bitcoin ETFs have been the subject of much controversy due to their high price point, typically tens of thousands of dollars. As a result, investors already wealthy enough to trade Bitcoin on margin do not need a fund that tracks the cryptocurrency.
Are spot Bitcoin ETFs better than futures?
The main difference between a spot bitcoin ETF and a bitcoin futures contract is that an ETF is purely an investment vehicle. Depending on the type of contract, it may be traded by people like a stock, but its value does not change during the day, whereas the value of futures contracts fluctuates as the underlying asset price changes.
The main advantage of CFD (contracts for difference) is that they can be bought and sold with no capital requirement, unlike other investments such as stocks, bonds or funds. In addition, they allow traders to focus on price movements rather than volume fluctuations because all positions are recorded about the dollar amount invested by each client.
In the same way, ETFs are more similar to funds because they represent a share of the entire value of an underlying asset – in this case, bitcoin. On the other hand, Bitcoin futures are widely used as hedging tools for other investment assets.