im on hold waiting for a client so i thought i'd type this up in the meantime, primarily using what i know from experience at work.
BTC, when used in derivatives, is more or less exactly like every other underlying asset. the actual properties of the asset are not important to people like me when designing the products or the exchange upon which they are traded. i dont believe at this time that any legal alternatives exist for other coins.
disclaimer: i refuse to invest in BTC or trade it. the volatility is too great and i can see no meaningful way to distinguish what would make it move up or down and with that being the case I'd genuinely prefer going to atlantic city with my money instead.
now on to how Forwards work and what they're intended to be used for:
1. hedging - hedging, for those not acquainted with the idea, is essentially an attempt to limit losses and protect gains. its a way to get exposure to something without directly touching it in this case. BTC has a good case for hedging because of the volatility and because there are natural longs in the market (miners). a natural long is someone who, by the very nature of their trade, want to see the price of the underlying asset go up. think like, exxon -> they "mine" for oil so they naturally would like oil prices to be higher.
the way you would hedge in this case -> say $1,000 per BTC is an acceptable price for you. it allows you to fund your business and operations and as such you would like to lock in that price. howevver, the market keeps bouncing around from $800 to $1200. while of course you'd love $1200, it isn't necessary for you to keep your servers running, pay your employees or take home some profit. you know you will mine 1 BTC per year.
in a situation like this you will enter into contract (a forward) with a counterparty. you will agree that on 3/19/2019 you will give him 1 BTC and he will give you $1000. simple, right? you know now exactly what you're getting, how to budget your business around it, exactly what to expect. if, on 3/19 the price is LOWER than 1k then you saved yourself! if its higher you missed out - but you're willing to take that loss in exchange for the stability that comes with that same budgeting and planning. (note: NDF / non deliverable forwards you dont ACTUALLY exchange the underlying asset but you just use the difference between the amounts, it's not really important though for the case of understanding the idea. in contracts like these you will often have specific time and dates when they get evaluated (side note again there is often times in which the trade is marked prior to the end but again, not important for the concept).
something like this is relevent for these trades:
2. speculating - same way as if you simply bought BTC, however there's some benefits here. 1, you typically know your counterparty or at least the counterparty is assured in some sense. for example, to trade on a SEF (swap execution facility) you have to pass a huge amount of stress tests by the CFTC to even be allowed. any trade is going to be "cleared" by a house like the CME (chicago mercantile exchange) basically saying "yeah, this guys good for it to X degree". this is some dodd-frank stuff that makes our financial system stronger but i think they're trying to repeal parts of this now, idk i dont follow compliance stuff too closely.
the assurance of trading a derivative is ironic in BTC trading. one of the big question marks with BTC is that the exchanges are kinda, well, insanely shitty. they're not really regulated to any degree, they provide no guidance on the taxation implications of any trade, prices are subject to manipulation, etc. on a SEF however you have a lot more insurance that you will be compensated, you will have someone to talk to if you have questions, you have a reliable counterparty, and (typically) you can get OUT of your position if you need to. from casually watching BTC trades i have noticed that this isn't really always the case when the market is crashing which should be an enormous red flag for literally any trader.
forwards also provide a way for someone to get exposure to shorting BTC which, as far as i know right now, basically no exchange offers. shorting in a nutshell is borrowing the asset, selling it, and then agreeing to refund the person you borrowed from at some point in the future. i dont think any reputable broker offers that at this point so you need a forward to get the same exposure - if i think BTC will go down i can just go buy a btc and agree to sell it at an agreed upon date for an agreed upon time: counterparty X may have to pay $1k for it when the spot price is $800.
conclusion:
trading is really fun , there's tons of ways to do it an cryptos are such a ludicrously nascent market and as a professional in trading it kinda pains me at times to see people enter into the market with such large portions of their net worth at risk w/ so little trading. granted these are typically going to be institutional-only but i think a lot of people caught in the wave of crypto investing would do well to educate themselves on the fundamentals of the art rather than jumping right in and putting a ton of their money at risk.
