Bitcoin Purchases vs. Bitcoin Futures: What Do You Need to Know?

4 August 2021
 Categories: Finance & Money, Blog

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Futures are a common concept in investing. If you aren't familiar with them, these contracts are essentially long-term commodity orders. By purchasing a futures contract, you agree to take ownership of a commodity at some set date in the future. Futures traders buy contracts when they expect the price to rise, selling their contract at a higher price later without ever taking physical ownership.

Cryptocurrency futures are a new concept and one you might encounter if you're planning to buy bitcoin or another digital currency for the first time. These instruments may or may not be suitable for you, but it's crucial to understand what they are and how they work before you buy bitcoin. Keep reading to learn why this distinction matters and how it might affect your purchase.

How Are Bitcoins Traditionally Purchased?

Bitcoins are fundamentally digital tokens or digital currency. When you make a traditional bitcoin purchase, the record of that purchase goes into the blockchain, which is effectively a digital ledger. Unlike using a bank or a credit card, this ledger doesn't store personally identifiable information. Instead, it tracks bitcoin transfers between digitally identifiable wallets. In a way, you can think of this as equivalent to holding cash. The wallet owner is the person with access to that wallet. You can do whatever you want with your wallet, including holding it as an investment to sell in the future or using it as currency.

When you buy bitcoin from another owner, a bitcoin exchange, or a bitcoin ATM, you'll do so by transferring money into your wallet. Some of these methods also create new wallets for the transaction. As long as you have access to that wallet, you can consolidate your purchases into a single wallet using one transaction.

What Are Bitcoin Futures?

Investing in a cryptocurrency through a traditional brokerage firm usually means purchasing bitcoin futures. If your only goal is to use bitcoin as an investment, there may be very little practical difference for you. With bitcoin futures, you're investing in a derivative product rather than purchasing bitcoin directly. You won't have access to the wallet, but you can buy and sell for investment purposes.

Whether you're genuinely buying bitcoin when purchasing futures is a matter for some debate. In practical terms, futures trading through a broker is an excellent way to start cryptocurrency investments. In most cases, bitcoin futures follow the immediate price of bitcoin very closely.

Which is Right For You?

The best way to purchase bitcoin will depend on your goals for the asset and your level of comfort with the technology. If you want to hold your own cryptocurrency wallet, using an exchange to buy bitcoin is the way to go. For most hands-off investors, the difference between cryptocurrency exchanges and traditional brokerages may be a matter of personal preference.

Keep these tips in mind when looking to buy BTC cryptocurrency.