How Does the Custody Risk Change for a Physically-Settled Bitcoin Futures Contract versus a Cash-Settled One?
A physically-settled Bitcoin futures contract requires the party receiving the Bitcoin to have a secure wallet and manage the private keys, introducing direct custody risk. The counterparty delivering the Bitcoin also faces the risk of a secure transfer.
A cash-settled contract eliminates this entirely, as only fiat or stablecoin is exchanged, typically within the exchange's or clearinghouse's managed accounts, avoiding the need for direct crypto asset management by the end-trader.
Glossar
Crypto Asset Management
Valuation ⎊ Crypto asset management, within the context of cryptocurrency, options, and derivatives, centers on determining fair value for illiquid or complex instruments, often employing models adapted from traditional finance but incorporating blockchain-specific data.
Custody Risk
Exposure ⎊ Custody risk within cryptocurrency, options, and derivatives centers on the potential for loss or unavailability of assets held by a third-party custodian, representing a critical operational vulnerability.
Bitcoin Futures Contract
Leverage ⎊ A Bitcoin Futures Contract represents a standardized agreement to buy or sell Bitcoin at a predetermined price on a specified future date, functioning as a derivative instrument whose value is derived from the underlying spot price of Bitcoin.