Futures contracts allow to almost perfectly hedge the price risk of digital assets. Assume you own 1 bitcoin which currently trades at 5,000 USD and you want to lock in this price. By selling short 5,000 Futures contracts (each with a contract size of 1 USD), you have locked in the current price, no matter if bitcoin moves up or down.
Note: these examples are for demonstrative purposes only and do not include trading fees nor funding rate payouts.
|EXAMPLE: PRICE INCREASES||Assume you buy back the Futures at 6,000 USD. You incur a loss of ( 1 / 5,000 - 1 / 6,000 ) * (-5,000) = -0.17 bitcoin. Including your original 1 bitcoin, you now own only 0.83 bitcoin. At the new spot price of 6,000 USD, this is still worth 0.83 * 6,000 = 5,000 USD.|
|EXAMPLE: PRICE DECREASES||Assume you buy back the Futures at 4,000 USD. Your profit is ( 1 / 5,000 - 1 / 4,000 ) * (-5,000) = 0.25 bitcoin. Including your original 1 bitcoin, you now own 1.25 XBT. At the new spot price of 4,000 USD, this is still worth 1.25 * 4,000 = 5,000 USD.|