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    What are Bitcoins & How Does Bitcoin Work?

    What are Bitcoins & How Does Bitcoin Work?

    Bitcoin is a digital asset that works as a currency, operated by a decentralized authority Balances are being kept using public and a private keys-long string of numbers and letters linked through the mathematical encryption algorithm that was used to create them-and all the transactions are being made by computing power. It is one of the digital currencies that is now widely being used,a peer-to-peer technology to facilitate instant payments.

    What are Bitcoins & How Does Bitcoin Work?

    Bitcoin Futures

    It is a forward agreement that obliged the buyer to purchase an asset and seller to sell an asset at predetermined future date and price. Bitcoin futures work the same way. It compels the buyer or seller to buy or sell the specific amount of bitcoin within the specified time frame for a set price. Futures offer risk management, leverage, and centralized price discovery to large institutions

    Arbitrage 

    The price difference between BTC spot and thefuture markets toprovidean opportunity for arbitrage-buy low, sell high-by taking along position in thespot market and ashort position in the underlying futures. If the futures are cheap compared to the value in thespot market, the trader could sell the underlying and buy the futures. In contrast, buying at spot rate and sell as per future rate would be the most desirable if the future contract is theoretically expensive. The idea is called cash-and-carry arbitrage. 

    Price Limit

    Price limits have now been determined by using the BTC reference rate at which trading will be slow and in some cases even halt. Prices are not allowed to move above or below the 20% from the prior day’s close. This restricts dramatic price volatility usually found in BTC market.

    Prices will fall down in the long-run

    Futures trading could end up reducing the price of Bitcoins as it gives new investors a choice to bet against BTC and settling the contracts in dollars so that they can boost their liquidity. This market also allows investors to trade off the cryptocurrency without actually owning it. In this way, they remain protected against any volatility in the real-time spot market. Ultimately, demand for BTC will fall and will also cause shed in BTC prices.

    Legitimization of the market

    The two trusted pillar of the financial industry, Chicago board options exchange CBOE and Chicago mercantile exchange CME have already taken a significant step towards the legitimization of bitcoin futures.

    Market is immature

    Some experts think the underlying bitcoin market is yet not mature enough for a futures market. The BTC market is unstable as bitcoin exchanges under pressure and printing in an uncontrolled way different prices when trading volumes increase sharply. The market is yet not secure enough and hacking concerns are also there. Furthermore, technology is not mature enough to be regulated. This sort of instability in BTC market could spread to other corners of the futures markets.


    Bitcoin Futures- a bubble

    The bubble exists when investors demand based on the exaggerated expectation of appreciation of an asset value, drives the prices upward. The bubble may end up after coming back to its standardized value.The value of bitcoin does not equal to its market fundamentals and all the transactions creating an illusion. And an illusion is an illusion, an idea that is actually not true.

    The volatility of this cryptocurrency, clouds of regulation, scalability issues,and much other reason demonstrates the fact that BTC is not a traditional currency. So there’s a myth among the buyers that are hoping to sell their bitcoins at even higher prices in the future and they will eventually be disappointed.

    Author bio: Sarah Smith has been a personal finance author for the last five years. She is also an independent and a very passionate finance and investment advisor. She regularly posts at www.personalincome.org.


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