Bitcoin basics: how Bitcoin futures work
It takes two to tango
A simple example
Some admin points
Exchanges, such as the Chicago Board Options Exchange or the Chicago Mercantile Exchange (the earliest of the big exchanges to offer futures) need to decide certain things up front that will then apply to all participants. Key amongst these are;
· How many Bitcoins there will be per contract (1? 5?..)
· What reference price will be used to settle up profits and losses
On the latter point, you need a price to compare to the original contract price of $20,000 to work out how much one party must pay to the other. This reference price may be determined in different ways, depending on the exchange in question. The CBOE, for example, uses the price given on a well-known platform called Gemini on the date a Bitcoin futures contract expires. The CME on the other hand prefers to average several reference prices obtained from different sources.