What is futures trading?
A futures contract is one in which the buyer agrees to purchase the underlying asset at a specific price at a future date in exchange for the seller continuing to sell it at that price at a later date. In the case of the Ethereum Futures Trading, the underlying asset is the Ethereum cryptocurrency.
The seller, however, does not deliver ether to the buyer during settlement; ether futures contracts are settled for cash; if the settlement price of ether exceeds the contract price, the seller agrees to pay only the difference in dollars. In the same way, the buyer pays the seller if the settlement price is lower than the contract price.
What is the price used for ether? It is based on the CME CF Ether-Dollar Reference Rate (ETHUSD_RR). Each day, the system calculates a volume-weighted average price (VWAP) for ether based on data collected from major Crypto Trading Platforms such as BBTC, Coinbase, Bitstamp, itBit and Gemini.
Traders can order up to 100 contracts on CME Globex, the exchange’s electronic trading platform that runs continuously to accommodate traders from all time zones. Each contract is worth 50 ether and priced in U.S. dollars. At the expiration of the contract (when it is scheduled to be settled), the buyer and seller must adhere to their commitments to buy the contract and sell it.
What are the pros and cons of trading Ethereum futures?
Pros:
- As a result, you will stand to profit from the future movements of Ethereum’s ether cryptocurrency in the future.
- Take advantage of the opportunity to gain exposure to the digital asset market without the need to navigate unregulated crypto exchanges and set up digital wallets.
- Capital efficiency can be increased by using leverage.
Cons:
- You are not eligible for any Ethereum forked coins since forked coins originate from “hard forks,” which are when a blockchain splits into two. It happens for a variety of reasons, including the need to implement a major change to the protocol which isn’t backwards compatible with the old chain, the desire to create an open-source project that is spin-off of Bitcoin, or a disagreement between miners and/or developers that leads them to separate. With the creation of a new blockchain, a new cryptocurrency is also created, which is distributed to all holders of the original blockchain tokens.
- It’s not an airdrop. Airdrops are when crypto projects give away free tokens for completing certain tasks, joining certain communities, or encouraging adoption.
- A minimum purchase amount of one contract costing the USD equivalent of 50 ether – currently $85,000 – is required to enter the market for regular investors.
- Futures trading carries an “unlimited liability” risk where traders can lose more than just the money they initially invested. Trading futures contracts can result in traders going bankrupt in some extreme cases. The price of the underlying asset can move at any time because there is no limit to how high or how low it can go. For example, Barbara enters into another ether futures trade with Bob for one contract with a notional value of $90,000 and an expiration date of May. During the month of May, the price of ether dramatically increases to $4,000 per coin. To settle the contract, Barbara must pay Bob $200,000 (50 times 4,000).
How easy is it to trade Ethereum futures on the CME?
You’ll need to open an account with a registered futures broker in order to trade ETH futures on CME. You can find a list of brokers here. When you’re ready, you can place an order through your broker by telling them how many contracts you want to buy or sell and when you want them to expire.
