Bitcoin futures contracts are one of the most traded cryptocurrency derivatives. They were introduced by Cboe Futures Exchange, LLC in 2017. Since then they have become one of the best achievements in Bitcoin’s market to date. Currently, there are quite a number of crypto exchanges including the likes of Chicago Mercantile Exchange (CME), BitMEX, TD Ameritrade and Phemex among others are now offering Bitcoin futures. Bitcoin futures give the Bitcoin ecosystem transparency, liquidity and price efficiency.
Just like any other cryptocurrency derivatives, Bitcoin futures give crypto traders the chance of trading Bitcoins without the need to hold any Bitcoins.
What are Futures contracts?
Financial futures are contracts that specify the buying or selling of an underlying asset at a predetermined price on a precise date in the future. Counter parties are obligated to fulfill the terms of the contract upon expiration, either buying or selling the asset at the price once the contract expires. Parties can take two positions in a futures contract; long or short. Long means that the party agrees to buy the underlying asset in the future at a specific price, while short means the party agrees to sell the underlying asset at a specific price upon the contract’s expiration in the future. Futures contracts are traded on regulated exchanges and are regulated by the Commodity Futures Trading Commission.
What are Bitcoin futures?
In a nutshell, Bitcoin futures contracts allow traders to trade on the value of Bitcoin without owning the Bitcoin. Most Bitcoin futures contracts are cash-settled, meaning that the trader receives returns in terms of fiat currencies. However, there are some Bitcoin futures exchanges that have introduced physical settlements, where the traders receive real Bitcoins once their contracts close.
Contrary to the spot market where buyers and sellers dictate the market prices of cryptocurrencies through over-the-counter (OTC) contracts, in Bitcoin futures trading, the exchanges standardizes the contracts. The Bitcoin futures contracts have standardized sizes depending on the exchange. In some exchanges, a single Bitcoin futures contract could be worth $1 while in another exchange the contract could be worth $10.
What are the benefits of Bitcoin futures?
Bitcoin futures contracts are settled every trading day, based on transparent reference price, reflected in all Bitcoin-related contracts. Unified price reference mitigates the volatility of spot prices, making Bitcoin suitable for payment purposes.
This is probably one of the most touted and most controversial advantages of Bitcoin futures contracts. Hardcore crypto fans believe that the regulatory environment kills the libertarian nature of cryptocurrency that was born to be free, but the majority of market players are sure that regulation is a necessary step to Bitcoin mass adoption. The futures markets are regulated by Commodity Futures Trading Commission (CFTC), which is not as strict as SEC in terms of oversight. It sets the rules to be observed by all participants, ensuring equal opportunities for investors and speculators, fraud protection and predictability.
Leverage allows trading many Bitcoins while paying only a portion of the real price. It makes futures trading more appealing to investors as they don’t have to pay the full cost of the asset to profit from the price movements. At the same time, it makes trading riskier and may cause significant losses if a trader gets it wrong.
Bitcoin futures provide traders with the instrument to short sell, that is to bet on price fall without actually owning the asset. It unlocks investment opportunities for crypto skeptics, namely for those who don’t have Bitcoins, but believe that the price will go down.
Opening and closing positions in BTC futures contracts
In a nutshell, Bitcoin futures entail opening of an account with a crypto derivatives exchange that offers BTC futures, depositing funds in your account and buying Bitcoin futures contracts with the deposited funds. You can choose to open a short or a long BTC futures contract depending on your market prediction.
Short BTC futures contracts positions
This is similar to placing a short (also known as a sell) in the spot market. When a short Bitcoin futures contract is placed, your account balance rises as the Bitcoin prices fall. In short, you enter a contract to sell BTC at a predetermined price predicting that the sport market price of BTC will fall below that price in the future before your contract expires. Therefore you shall be selling the Bitcoins at a higher price than the market price and thus gaining profit.
If your market price prediction turn out to be wrong, and the prices rise instead of falling, then you shall end up making a loss.
Long BTC futures contract positions
This is similar to placing a long (also known as a buy) in the spot market. When a long Bitcoin futures contract is placed, your account balance rises as the BTC prices rise. In short, you enter a contract to buy Bitcoin at a predetermined price predicting that the sport market price of BTC will rise above that price in the future before your contract expires. Therefore you shall be buying Bitcoins at a lower price than the market price and thus gaining profit.
If your market price prediction turn out to be wrong, and the prices drops instead of rising, then you shall end up making a loss.
To learn more, Read our article on How to trade bitcoin Futures.
Where can you trade Bitcoin futures?
There are many cryptocurrency trading platforms, however not many do trading futures. One of the recent new player in the market is Phemex. Phemex is the fastest cryptocurrency derivatives exchange platform on the market. It offers Bitcoin, Ethereum, Ripple, Litecoin, and other perpetual futures contracts, with up to 100x leverage. Trader will receive up to $72 in Crypto trading bonus. An in-depth analysis can be found on Where can you Trade Bitcoin Futures?