What are Bitcoin futures?
To trade Bitcoin futures is like trading on the exact same principles of traditional financial assets futures. These were introduced to hedge the investment risk in financial markets by evening out the price when the underlying asset is prone to volatility.
A Bitcoin futures contract is a contract between two parties which lets them buy and sell Bitcoin at a fixed price and at a specific date in the future.
Once the contract has been established both the buyer and the seller are obligated to go through with the transaction at the predetermined price on which they agreed, not taking into account the current market prices
Bitcoin futures, like traditional futures, use leverage, which means that an investor does not have to own the entire amount of BTCs to take a position.
How to trade Bitcoin futures: Positions Explained
There are two positions which can be taken in a contract, the “long” position, and the “short” position respectively.
By taking positions both parties will have some degree of protection against any potential losses due to Bitcoin price fluctuations.
The buyer is the one that usually “goes short”, as he or she is looking for the best price he/she can get. The seller “goes long” with the purpose of getting more money for his/her Bitcoins when the contract expires.
Short and long
If you trade bitcoin futures on a long position, you speculate that its price will rise in the future. When you predict that prices will go up, you will have an interest in purchasing a call option. This type of option will enable the purchase of Bitcoin at a pre-set price in the future. For instance, considering Bitcoin’s current price is 4,000 USD and you see a rise of 10,000 USD in 5 months later, you’d pay more for a call option that lets you buy Bitcoin for 4, 000 USD in 5 months when the market buying price is 10,000 USD.
If one assumes a short position on Bitcoin, you predict that the crypto coin prices will drop. The put options allow you to sell Bitcoin at an established date in the future and at a price above the one you predict in the future. Say if that the Bitcoin price is of 4,000 USD and you expect the price to drop to 1,000 USD in 5 months, then put options give you the possibility of selling Bitcoin for 4,000 USD in 5 months when everybody else is selling at the market price of 1,000 USD.
The long position is similar to buying the underlying asset itself, with the main advantage here being that it gives you more leverage.
The call and put options both have a certain date at which they expire. If you don’t sell your option at any time before the expiration date, there are two scenarios that can happen.
If the price rises as you predicted, then your option is very valuable as you can buy BTC cheaper than current market prices. Therefore, this option is “in the money”. When your option does not bring you any profit, then your option is “out of the money.” If the option is “in the money,” you will get the value of Bitcoin in cash, due to CME Bitcoin futures being settled in cash. The other scenario involves you losing all your money from your account.
Let’s suppose you trade bitcoin futures and you have entered on a short contract in which you are selling 5 BTC for the price of 20,000 USD at a set date. But if the prices go higher than 20,000 USD before the established date, it would be normal not to want to go through with the contract anymore and sell cheap.
So what is there to do now? Well, to keep both parties happy, the exchange on which you trade the futures will let you sell at the current price of 21,000 USD to minimize your losses, but the other party will receive compensation from your margin account.
This type of transaction is not settled on the expiration date of the contract, but on all days trading is available on the exchange, respecting the current market prices.
But to be able to do so, you will have to set up an initial margin when you start the contract. The minimum margin or maintenance margin is also determined by the broker. If you start emptying your margin account, a margin call is triggered and your broker will require to fund your account back to the initial margin.
But if you are not able to fill the margin account back when the margin call is made, then the broker is entitled to sell your assets at an even more unprofitable price.
How to trade Bitcoin futures: Exchanges
There are currently two exchanges that accept Bitcoin futures: The Cboe futures exchange and the CME Group. You can choose the exchange you want but it would be recommended that you select the one with the highest number of Bitcoin futures issued, as they offer more liquidity.
Note: Futures exchanges are not open 24/7 like the trading markets, instead they have an operating interval of 6 days per week.
To be able to trade on these exchanges you have also to be a broker. To qualify for this position, you must pay a high fee of hundreds of thousands of dollars. Individual investors that can’t fork up the fee have to resort to finding a broker who already trades on CME.
The next step to trade bitcoin futures is to open an account with this broker. A fee will be required for his or her services as acting as an intermediary. A margin account is a more preferred option than a cash account because if something goes wrong the broker needs a way of solving the deal amiably which can only be done via margin accounts.
On any broker’s profile page listed on the exchange, there will be featured a list of industries as well as the financial assets in which he or she is specialized in trading. Select the one that features Bitcoin futures.
You must also take note that there are some differences between Cboe and CME in terms of:
- Margin requirements. CME has a 35% margin requirement while Cboe has 40%.
- Contract expirations
- Halt limits
Trading with Bitcoin futures still has a long way to come before it can be adopted by more brokers. Because of this, this type of futures contract is very scarce as a trading option on all trading platforms. If you’re interested in the more widespread spot bitcoin trading, here’s a nice guide on how to trade bitcoin.