A Futures contract is an agreement to sell an asset at some point in the future at a price that is determined today.
These contracts are especially relevant to retail traders today because of their widespread use in the cryptocurrency space.
A simplified example of a Bitcoin futures contract is: The buyer agrees to buy 5 Bitcoin from seller for $40,000 in 6 months.
If the price of Bitcoin in 6 months is above $40,000 that’s good for the buyer since they’re buying at $40,000.
If the price is lower than $40,000 that’s good for the seller since they’re selling for $40,000.
So the question that suggests itself is:
Are cryptocurrency futures halal or haram?
Dealings with cryptocurrency futures contracts often involve the following haram elements:
1- Paying/Charing Interest
The most obvious violation when it comes to futures is if the broker is charging interest on any loans they are providing you.
This interest is a form of prohibited (haram) riba.
But you already knew that.
2. Buying/Selling the futures contract
Buying and selling debt is prohibited in Islam. It is also considered riba.
As a party to a cryptocurrency futures contract, you have a financial obligation to the counter-party to either buy from them or sell to them.
If you decide to sell your financial obligation, we’re now in Riba territory since you are selling a debt.
3. Cash settlement
This is how the majority of cryptocurrency futures contracts work, i.e. they are cash settled.
Cash settlement means an investor takes cash instead of physical delivery of the underlying assets upon settlement of the futures contract.
E.g. of a cash settled futures contract: let’s say I have the obligation to buy 1 Bitcoin for $35,000 and the price of Bitcoin is $36,000. This contract is worth $1,000 to me. Therefore on delivery day instead of delivering 1 Bitcoin to me, the counter-party delivers $1,000 to me.
Alternatively, if the price of Bitcoin is $34,000 and I’m obligated to buy at $35,000, the value of the contract is negative $1,000 to me and so I pay the counter-party $1,000 on the date of delivery.
This is no different from a bet between myself and the counter-party wherein we agree that if the price of Bitcoin is below $35,000 I’ll pay them the difference and if its above $35,000 they’ll pay me the difference.
So cash-settled futures are just financial bets.
One party is betting the price goes up while the counter-party is betting the price goes down.
One party’s gain is the counterparty’s loss.
This is a form of prohibited Al-Maysir (gambling).
It meets the criteria for Al-Maysir which is that:
1- The activity involves no usefulness.
2- The participants are risking their wealth in hopes of gain.
About Al-Maysir, the generous Quran says the following (translated into English):
O you who believe, intoxicants, Al-Maysir (gambling), sacrificing for idols and making decisions based on games of chance are sicknesses from the work of Satan, so avoid these things so you may prosper. Satan desires to create enmity and hatred among you through intoxicants and Al-Maysir and to stop you from praying and remembering Allah. So will you abstain from these things?THE HOLY QURAN 5:90-91
Dealings with cryptocurrency futures contracts often involve paying or charging interest, buying or selling your financial obligations under the futures contract, and cash settlement of the futures contract which are all haram.
And Allah knows best.