How do Futures Work and Why Are They So Popular?


In 2017, according to the Futures Industry Association (FIA), total global futures volume achieved a record high of 25.2 billion contracts. The value of all these exchange-traded futures and options contracts was an estimated $33.6 trillion (based on data provided by the Bank for International Settlements).
Let that sink in for a moment. Not millions of dollars. Not billions of dollars. Futures trading is a trillion-dollar industry--one that Digitex is planning to turn upside down!
And it only gets better. Both of the estimates above are expected to increase for 2018 and the year ahead. In fact, the futures industry has enjoyed several consecutive years of uninterrupted growth. Why is this and, perhaps more importantly, will the expansion continue? Let’s review the details, and along the way, answer the basic question: How do futures work?

How do Futures Work? The History of Futures Trading

Organized futures trading dates way back to April 3, 1848, when the Chicago Board of Trade (CBOT) was officially launched. The exchange was created to help farmers and ranchers remove some of the price risks from their grain crops and livestock operations.
If you need the value of a futures contract explained, it's simple. Futures contracts were used as hedging vehicles to help the agriculture industry reduce the volatility associated with farming and ranching. Speculators would often take the opposite side of the farmers’ futures contracts in an attempt to profit from price movements in commodities such as corn, soybeans, wheat, and cattle.
These futures contracts turned out to be an excellent arrangement for both farmers and speculators alike, and are essentially how futures work today.

Introduction of Financial Futures

For the first 130 years of their existence, futures exchanges offered basic agriculture and food contracts. However, throughout the 1970s, multi-national corporations began searching for ways to limit their exposure to fluctuations in foreign currencies, interest rates, inflation, and energy prices.
In response to this demand, the CBOT introduced the first financial futures contract in 1977. It was a contract based on the underlying price movement of United States Treasury Bonds. This futures contract was used by corporations to reduce their interest rate risk.
The Treasury Bond futures contract became extremely popular among corporations and individual speculators who had learned how to invest in futures to their best advantage. Therefore, it didn’t take long for the futures exchanges to capitalize on this popularity by introducing several other financial futures contracts so more traders could enjoy the benefits of futures trading.
Throughout the remainder of the 1970s and into the 1980s, exchanges introduced foreign currency futures, stock index futures, energy futures, and additional interest rate futures contracts.
The futures exchanges picked a perfect time to launch these new contracts because Wall Street was on the verge of unleashing a multi-year bull market in stocks and bonds.
In the early 1980s, investors began liquidating their holdings of physical assets in exchange for financial assets (i.e. paper assets). The big beneficiaries were stock mutual funds and financial futures contracts. Of course, the futures exchanges who sold these products to investors made a fortune in commissions and fees, leading to others wanting to learn how futures work!

The Arrival of Cryptocurrency Futures

Bitcoin, the very first cryptocurrency, made its debut on January 3, 2009. Eight years later, on December 11, 2017, Bitcoin futures trading was introduced by the Chicago Board Options Exchange (CBOE). One week later, the Chicago Mercantile Exchange (CME) introduced a Bitcoin futures contract.
Both of these futures contracts have been extremely popular among the trading community who already understood how futures work even if they didn’t understand cryptocurrency. In fact, CME daily volume increased by 93% in the second quarter of 2018 in comparison to the first quarter!
Based on the rapid increase in Bitcoin futures volume, it appears that part of the cryptocurrency community prefers trading futures contracts instead of spot (cash) contracts. However, the majority of cryptocurrency exchanges only allow for spot trading (with the notable exception of BitMEX).
Taking the size of the futures trading market into account, cryptocurrency futures trading could well become the most popular investment vehicle among traders and speculators. This is exactly what occurred in the 1990s and 2000s in traditional markets, as traders abandoned agriculture futures in exchange for financial futures. We believe people are ready to learn how to invest in futures for bitcoin and other cryptocurrencies. Start with the basic question “How do futures work?” and soon enough, you’ll be trading bitcoin futures alongside the best of them.

Digitex Offers Commission-Free Trading of Cryptocurrency Futures

Digitex Futures exchange is opening for business in December 2018. Traders will be able to buy and sell cryptocurrency futures contracts in Bitcoin, Ethereum, and Litecoin. As an added bonus, Digitex will be a commission-free exchange!
With the notable lack of major exchanges offering cryptocurrency futures trading (Coinbase, Binance, Gemini... the list goes on), traders are in for a treat! Added to that, the chance to make money in a bear market through margin and leverage trading thanks to zero commission fees. We're quietly confident that Digitex is breaking the mold.
In fact, if you want to be one of the first traders to learn how to invest in futures on the Digitex exchange, sign up to join our Early Access Waitlist right now!
You could also follow us to the Malta Blockchain Summit next month to see a live demo of the product. Our CEO Adam Todd will be a keynote speaker at the conference. During the two-day event, Adam will provide a real-time working demonstration of the Digitex Futures exchange! The countdown is officially on!

Personal Observations

During the next decade, purchasing a seat on a commodity exchange will become much less expensive as the industry is completely disrupted by commission-free exchanges like Digitex.
Owning a seat on the exchange will be very similar to purchasing a taxicab medallion in New York City. Thanks to the popularity of ride-hailing services like Uber and Lyft, the demand for taxicab medallions has plummeted as much as 80% during the past five years.
I predict that Digitex will cause the same type of decline in the price of seats on the various commodity exchanges. This is another example that proves it’s impossible to stop the forward progress of innovation.
Digitex Futures writers and/or guest authors may or may not have a vested interest in the Digitex Futures project and/or other businesses mentioned throughout the site. None of the content on Digitex Futures is investment advice nor is it a replacement for advice from a certified financial planner.