How to trade Bitcoin Futures?

Digital assets are volatile investments and so is Bitcoin. Many of the Bitcoin traders and investors follow a strategy where they buy Bitcoin when the price drops and sell it when the price goes up. 

What if the price of Bitcoin increases even after you sell the asset?

It’s obvious that you will miss out on the profits you could have earned if you would not sell your Bitcoins. 

What to do in such a situation?

Why not have a futures contract which will allow you to buy or sell Bitcoin at a fixed price even in the future?

Yes, it is possible! 

When two parties enter into an agreement, they should buy or sell their cryptocurrency at the fixed price irrespective of the market price on the day of contract execution. Using futures contracts will help the traders to hedge the changing prices of the assets. 

In the case of financial assets like Bitcoin, Bitcoin Futures can be used. 

Now you must be wondering what is it all about? It’s quite similar to futures contracts and is also advantageous to trade Bitcoin Futures, let’s understand how.

What are Bitcoin Futures?

Bitcoin Futures are futures contracts that allow speculators to place a bet on the price of Bitcoin without having to own it. The first Bitcoin Futures was available to trade on December 10, 2017. Chicago Board Operations Engine (CBOE) and the Chicago Mercantile Exchange (CME) listed the Bitcoin Futures trading in December 2017. 

No cryptocurrency trading platform or wallet is required in Bitcoin Futures Trading. It is because either the futures contracts settle financially on the delivery date or are balanced by traders reversing out of their positions as the delivery date approaches. 

Suppose the buyer or seller of a bitcoin futures contract settles for a price and on the contract execution day, either of them sees a profit, then the difference between the purchase price and the settlement price is paid to the futures contract holder. 

After a brief introduction to what are Bitcoin Futures, let’s understand how to trade them. 

How to trade Bitcoin Futures?

Investors or traders who are participating in Bitcoin Futures can bet at the Bitcoin price for a certain period of time without having to own Bitcoins. Investors can either use a long trading method where the participant expects the price to increase or they can use a short trading method where they can eliminate the potential losses if the Bitcoin price goes down. Let’s understand these trading techniques.

Long & Short

If you expect that the prices of Bitcoin will rise up, then you will wait for a longer time. In such situations, you will buy a call option. A call option enables you to buy Bitcoins at a predetermined price in the future. Let’s consider an example, where the current Bitcoin price is $8000 and you are expecting it to reach $11,000 after 6 months from now. So, when you know the time has come where you have to buy Bitcoin, you will use the call option to purchase Bitcoin at $8000 while everyone is buying it at $11,000. 

In another scenario, if you expect the prices of Bitcoin will fall, then you will buy a put option. A put option enables you to sell Bitcoin in the future at a price that is higher than the future price you expect. Let’s consider the above example where the current Bitcoin price is $8,000 and you are expecting it to fall to $5,000 in 6 months, then you will use put options where you will sell your Bitcoin at $8,000 when others are selling it at $5,000. 

You can observe that in both the above examples where you use the call option and put option, there is an intrinsic value of $3,000. Using long is quite straightforward where you buy the asset with the only difference being that it enables you to have more leverage. 

There is an expiration date for both the call and put options. In case of a call option, where you are buying Bitcoin for $8,000 on July 1, 2020, and have a running time of 6 months, which expires on January 1, 2021. Between these 6 months, you can sell the Bitcoin at any time. What happens if you don’t sell?

Suppose on the expiration date the Bitcoin price reaches $11,000, then you will purchase it at cheaper rates than the current price. In such a case the option is “in the money”. Conversely, if the price of Bitcoin drops to $5,000 on the expiration date i.e. January 1, 2021, then using the call option is quite worthless. Because no one will purchase Bitcoin at $8,000 when the actual market price is $5,000. 

In such a case, you will use the “out of the money” option. When such situations appear, then two things can happen:

“In the money”: You will receive money in cash because CME Bitcoin Futures is cash-settled.

“Out of the money”: Money vanishes from the account without bringing any profit. 

Hence, if the price of Bitcoin is falling before the expiration date, the options become worthless.

Margin

Let’s take an example to understand margin trading in a simple way. Suppose, you enter a Bitcoin Futures contract with Mark where you agree on selling him 1 BTC on August 1, 2020, at a price of $5,000. To process this transaction, you choose an exchange like CME. 

1 Bitcoin price rises to $5,500. In this situation, you do not want to sell your BTC at $5,000. So, to process a fair transaction for both participants, the CME exchange will ensure that you can sell BTC at the current price of $5,500. The CME exchange will compensate your contract partner for this. Let’s understand how?

They will take the difference which is 500 USD from your so-called margin account and give it to Mark. This kind of settlement is performed on the expiration date of the futures contract as well as every day of trading based on the current price of Bitcoin. 

In order to ensure that you have money in your margin account, you should put up an initial margin at the beginning of the contract. The minimum margin is also defined by the broker. If your money in the margin account falls from your initial margin to the maintenance margin or minimum margin, then the exchange triggers a margin call where the broker requests you to fill your margin account to the initial margin. 

If you are unable to fill the margin account even after the margin call, then the broker has the right to sell your Bitcoins at a price that is more unfavorable than waiting for a good opportunity. So, it is better to avoid margin calls.

Where to trade Bitcoin Futures?

As Bitcoin is a cryptocurrency, it’s an asset as well as a currency. So, Bitcoin Futures trading can be done on various places which include:

  •  Cryptocurrency Trading Platforms: Here you can buy cryptocurrency futures by trading Bitcoin against other cryptocurrencies or fiat currencies. 
  • Foreign Currency Exchanges (Forex): In Forex trading, investors can buy Bitcoin Futures by trading Bitcoin as a part of the currency pair. 
  • Exchanges: The users can buy Bitcoin Futures by predicting the future price of Bitcoin in dollars.  

Platforms offering Bitcoin Futures Trading

While you know how to trade Bitcoin Futures, it is also necessary to understand where to trade them. You should find a trustworthy exchange which offers good security and an easy to use interface. So, it is better to do proper research before you choose an exchange platform to begin trading. 

Several platforms, financial institutions, and various cryptocurrency exchanges have signaled to launch Bitcoin Futures on their platform. Let’s see which are the major platforms where you can trade Bitcoin Futures:

  • Chicago Board Operations Engine (CBOE)

CBOE is one of the largest cryptocurrency futures exchange platforms in the world. It is also the first exchange platform to launch Bitcoin Futures.

  • Chicago Mercantile Exchange (CME) 

CME is a futures exchange platform which listed Bitcoin Futures in December when the price of BTC reached its maximum to $19,783.06. CME has also self-certified its Bitcoin Futures contract with the Commodity Trading Futures Commission (CFTC) in December 2017. 

Bitmex is a cryptocurrency exchange that offers Bitcoin Futures trading to everyone except to the U.S. citizens. 

  • TD Ameritrade

TC Ameritrade is one of the largest brokerage firms in the world which offers Bitcoin Futures Trading. This platform has oversight from the CFTC, SEC, and FINRA. It is also a designated self-regulatory organization registered with the NFA.

Along with these platforms, there are various other platforms as well like, OKEx, Nasdaq, Bakkt, and many others.

Advantages of Bitcoin Futures

Having known about the details of trading Bitcoin Futures, let’s now dive in to understand the advantages of Bitcoin Futures for investors and traders:

  1. Bitcoin Futures are traded on regulated exchanges. So, the process is more familiar and comfortable for mainstream and institutional investors who do not wish to deal directly with cryptocurrency exchanges. 
  2. The ease of predicting the price of Bitcoin without going through the storage process of Bitcoins works perfectly for those who are unfamiliar with how Bitcoin works. 
  3. By granting Bitcoin more exposure to investors, more liquidity is added to the cryptocurrency market. Hence, Bitcoin Futures trading leads to less volatility of Bitcoin price in the long-term and protects the investors from unfavorable price swings. 
  4. With Bitcoin futures trading, traders can easily execute both short-term and long-term trading strategies or safeguard any existing Bitcoin holdings.
  5. Bitcoin Futures Trading uses margin and leverage trading to control the Bitcoin Futures positions. Hence, allows efficient use of account equity. 

Conclusion

As we have seen more number of exchanges listing Bitcoin Futures trading on their platform, there is an effective growth in Bitcoin’s legitimacy. Also, the Bitcoin Futures has gained a lot of support from both the regulators and investors. But always remember that for futures trading, there is a winner and a loser. There may be some situations where you could end up with less money than you started with, so you should always be ready to take the risks. If you are an experienced trader, then there are chances that Bitcoin Futures can add an interesting twist to your cryptocurrency investment journey.