What is a stablecoin? As follows from the name itself, it is a cryptocurrency designed to minimize price volatility, that is, ensuring a stable exchange rate.

For instance, one unit of the largest stablecoin — Tether (USDT) is set to be equal to 1 USD, and for the last three years since its entrance in the public crypto market Tether’s exchange rate has been more or less stable — meaning that it fulfils its purpose well.

At the same time, we should point out that centralized stablecoins are a subject of many well-founded concerns, since it is impossible to transparently verify that they are really backed by their underlying asset the way their creators say they are. Thus, today we will discuss an alternative to stablecoins: a less known but just as efficient hedging tool. We are talking about Bitcoin futures, which are free from most of stablecoins’ flaws, have several unique advantages, and are currently undervalued. This article sets out to shed some light at what BTC futures are and why they are worth your attention.

Futures basics

The general public knows futures contracts as a speculative instrument. However, one of their main functions is hedging: by investing in futures, one can reduce the risks of negative price volatility of the underlying asset.

Futures in the cryptoworld are basically the same thing as in any other market, with a single difference — their basic asset is Bitcoin.

Before we move forward, let’s talk a bit about what hedging means. Let’s say you already hold a certain asset or plan to buy it in the future at a certain price. If the price changes, you would get either a profit or a loss relative to what you initially spent on the asset. In order to protect yourself from the risk, you can use futures in such a way that your profit or loss will not change regardless of the future price changes. By saying that futures are used as a hedging tool, we mean that they allow to fix the fiat price of Bitcoin for any period of time.

Example

Imagine that a certain Bitcoin miner — let’s call him Bob — plans to earn 3 BTC by in a month from now by selling mined Bitcoins, based on his mining system’s capacity. Bob does not yet hold that sum in Bitcoin — it all still has to be mined by the planned date of sale. Clearly, Bob is running a business risk here: if a month from now, when the planned sum has been mined, the price is still the same as it is now, then Bob will get a profit, but if the price falls, then he might lose all his profit. What can he do, then — apart from just hoping for the best?

The point of hedging is to insure oneself against uncertainties, making one’s crypto business more stable. So, as a hedging strategy, our miner will sell a BTC futures contract. Say that his future 3 BTC (those that he still has to mine) would now be worth $10k at the current price. Bob opens an equivalent short futures position -meaning that at the desired date in the future (in a month) he will be able to sell 3 BTC for $10 k. This way, whatever happens to the BTC price, the total value of his portfolio will not change:

- If the BTC price falls, Bob will lose some of the value of those 3 BTC he has, but he will win some thanks to his futures position. His variation margin will be positive — it will add him exactly as many BTC as needed to buy $10 000.

- If the BTC price grows, Bob will lose some money on his futures contract (because the futures states that he can sell his 3 BTC for $10k, while at the spot price he would get more than $10k), but he will also earn some profit thanks to the growing value of his 3 Bitcoins. The variation margin is negative, but since BTC has grown, Bob will again have just enough to get his $10 000 when he sells the Bitcoins.

In both cases, no matter how large the price change, Bob has successfully guaranteed himself his desired revenue of $10k for 3 BTC.

We Need To Go Deeper

If you have read through the example above attentively, you will have noticed that there was a slight hitch in the logical sequence. By the time miner Bob starts his hedging operation, he won’t have all of the 3 BTC yet; otherwise he would just sell them all for stablecoins from the beginning.

Here we can see the true power and flexibility of futures at work. Let’s say that at the moment when Bob begins the hedging process he has only 1 Bitcoin. However, he can still hedge all 3 Bitcoins that he plans to sell by getting an x3 margin at the exchange and using his 1 BTC as collateral. In this case, the futures contract will still compensate for all possible price movements, then only difference being that Bob will need to use leverage for that.

True, stablecoins are also often used to carry out hedging of the most basic kind (that is, fix the fiat value of an asset), but they cannot offer the flexibility of futures. Please not that even if Bob had all 3 Bitcoins at hand when he started hedging, he (as a clever entrepreneur that he is) would still be able to do the same trick with getting 3x leverage. The remaining 2 BTC could be used to reinvest in his business or in some other way.

As you can see, futures are a flexible tool with many applications that can help you hedge your risks and make your business more predictable. This is particularly valuable in the cryptoworld, where the extreme and sudden volatility of the Bitcoin price is now infamous and long-term planning is nigh impossible.