How to Invest in Bitcoin Futures

What Are Bitcoin Futures ?

Bitcoin futures enable investors to gain exposure to Bitcoin ( BTCUSD ) without having to hold the underlie cryptocurrency. They are like to a futures shrink for a commodity or stock exponent in that they allow investors to speculate on the cryptocurrency ’ s future price. The Chicago Mercantile Exchange ( CME ) offers monthly contracts for cash liquidation. This means that an investor takes cash rather of physical rescue of bitcoin upon settlement of the contract .

The Cboe Options Exchange offered the beginning bitcoin futures contract on Dec. 10, 2017. But it discontinued offering newly contracts in March 2019. The CME opened its bitcoin futures platform on Dec. 18, 2017. In summation to standard bitcoin contracts, the exchange offers Micro Bitcoin futures, which are 1/10th the size of a standard bitcoin, and options on bitcoin futures. other venues, like Bakkt and Intercontinental Exchange, offer day by day and monthly bitcoin futures contracts for forcible delivery.

Key Takeaways

  • As with stock or commodities futures, bitcoin futures allow investors to speculate on the future price of bitcoin.
  • Investors can choose from a variety of venues to trade monthly bitcoin futures. Some are regulated; others are not.
  • Bitcoin is known for its volatile price swings, which makes an investment in bitcoin futures risky.

Understanding Bitcoin Futures Investing

Bitcoin futures serve many purposes, each one unique, for different actors in the Bitcoin ecosystem. For Bitcoin miners, futures are a means to lock in prices that ensure a return on their mine investments, careless of the crypto ’ s future price trajectory. Investors use bitcoin futures to hedge against their positions in the spotlight market. For exemplar, if an investor bets on a price increase for bitcoin in the spot commercialize, then they might short its futures as a hedge. frankincense, they stand to make money evening if the bitcoin price moves in a direction diametric to the one specified in their count. Speculators and traders, who frequently move in and out of futures trades, might use bitcoin futures for short- and long-run profits .

There are several benefits to trading bitcoin futures alternatively of the underlie cryptocurrency. First, bitcoin futures contracts are traded on an commute regulated by the Commodity Futures Trading Commission ( CFTC ), which might give big institutional investors some bill of confidence to participate. For most of its short being, the cryptocurrency has traded outside the bounds of regulation, making it a hazardous asset for institutional money .

second, because the futures are cash-settled, a Bitcoin wallet is not required. No physical rally of bitcoin takes topographic point in the transaction. Thus, a bitcoin futures deal eliminates the risk of holding a volatile asset class with steep price changes. besides, holding bitcoin in custody can be an expensive matter and add to the overall costs. ultimately, futures contracts have put limits and price limits that enable investors to curtail their risk vulnerability to a given asset classify .

note that as of October 2021, investors can gain exposure to bitcoin without buying or selling futures themselves. The ProShares ’ Bitcoin Strategy Fund ( BITO ) tracks CME bitcoin futures. The exchange-traded fund ( ETF ) started trading on Oct. 19, 2021, as the beginning bitcoin ETF .

Where Can You Trade Bitcoin Futures ?

growth of the bitcoin futures market has paralleled that of the cryptocurrency ’ s spot grocery store. Cryptocurrency exchanges were the first venues to offer bitcoin futures trade capability. But the absence of regulation for cryptocurrencies made them bad venues for good traders .

The launching of bitcoin futures trade at CME and Cboe changed the status quo. While Cboe has discontinued bitcoin futures trade at its venue, CME has doubled down on cryptocurrencies and introduced other derivative instrument products related to it. For example, the Micro Bitcoin futures is 1/10th the size of a standard bitcoin futures contract at CME .

Bakkt, which is backed by NYSE owner Intercontinental Exchange, was launched in 2019 and advertises itself as an throughout solution to promote regulated monetary value discovery and marketplace liquidity. It besides offers trading in physically-settled bitcoin futures and options. ErisX is a Chicago-based trade firm that offers cash-settled bounded bitcoin futures trading capability that limits exposure to the cryptocurrency by setting upper berth and lower bounds .

Exchanges like Seychelles-based OKEx and Malta-based Binance are some of the biggest venues for trade in bitcoin futures. The latter substitution, in fact, is ranked first based on the numbers for exposed sake contracts on its platform. however, it is not regulated by U.S. authorities .

How Does Bitcoin Futures Trading Work ?

The rules and apparatus for bitcoin futures is the lapp as that for regular futures trade. First, you need to set up an account with the brokerage house or exchange to begin trading. once your account is approved, you can begin trade .

Futures trading makes arduous consumption of leverage to execute trades. In the unregulated Wild West of cryptocurrencies, the leverage come can vary wildly between exchanges. For example, Binance offered leverage of up to 125 times the trading sum to traders in 2019. It reduced the leverage measure to 20 times in July 2021 .

The chief considerations for bitcoin futures accounts are margin requirements and contract details. Margins are the minimal collateral you must have in your account to execute trades. The higher the come of the trade, the greater the margin sum required by the broker or exchange to execute the barter .

A orient to note here is that exchanges and brokerages can have different margin requirements. For exemplar, CME has a al-qaeda margin requirement, and brokerages like TD Ameritrade that offer CME bitcoin futures trade as contribution of their product suite can set margin rates on top of the base pace set by CME .

Because Bitcoin is a bad and volatile asset, regulated exchanges by and large require higher margin amounts compared to other assets. Some cryptocurrency exchanges, like Binance, allow the use of cryptocurrencies as margin. For model, you can use stablecoins, like Tether or bitcoin, as margin for your trades at Binance .

Reading Contract Details for Bitcoin Futures

Below are the contract details for bitcoin futures offered by CME :

  • Contract unit: 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate
  • Price quotation: USD
  • Trading hours: Sunday–Friday, 6 p.m.–5 p.m.
  • Product code: BTC
  • Margin requirements: 50% cash of the contract amount
  • Listed contracts: Contracts listed for six consecutive months and two additional Decembers
  • Settlement method: Financially settled

Consider the following case for a CME Group bitcoin futures contract. Suppose an investor purchases two bitcoin futures contracts totaling 10 bitcoin. The price of a individual bitcoin, when the futures condense was purchased, is $ 5,000 each, meaning the sum price for both futures contracts is $ 50,000. The margin requirements for bitcoin futures trade at CME is 50 %, entail that the investor has to deposit $ 25,000 as margin. They can finance the lie of the contract leverage by using leverage .

The contract ’ s value varies based on the price of the underlying asset ( i.e., bitcoin ). The Bitcoin Reference Rate is used by CME to determine the price of bitcoin. It is the volume-weighted median price for bitcoin sourced from multiple exchanges and is calculated daily between 3 post meridiem and 4 post meridiem London time .

Depending on bitcoin ’ mho price fluctuations, the investor can either hold onto the futures contracts or sell them to another party. At the end of their contracts ’ duration, the investor has the option to either roll them over to modern ones or let them expire and collect the cash settlement due. Some contracts, like the ones at Bakkt and ErisX, are physically settled. This means the investor will get final manner of speaking of the commodity—in this shell, bitcoin—upon passing .

Important

Remember that there are costs associated with hands and memory of bitcoin, once you get final rescue of the cryptocurrency in a physically settled futures contract. In 2021, CME introduced Micro Bitcoin futures ( MBT ) trade. The size of an MBT contract is 1/10th of one bitcoin or 1/50th of the larger BTC futures contract. frankincense, if the Bitcoin Reference Rate is set at $ 20,000, then the fanciful value of one Bitcoin Reference Rate is $ 400. More than 3,500 accounts traded in Micro Bitcoin futures after it was first launched .

limited Considerations for Trading Bitcoin Futures

While it has increased in volume, bitcoin futures trade is even nascent in terms of market dynamics and constituents. consequently, it is unlike other futures trading for other asset types. here are some particular considerations that you should note while trade bitcoin futures .

  • Bitcoin futures trading resembles spot markets for the cryptocurrency in that it lacks the deep pool of liquidity or sufficient number of actors in its ecosystem that are present for other commodities. Therefore, trading volumes can be low and price fluctuations can be high, especially during volatile stretches of the cryptocurrency’s price. Futures trading for other commodities can provide indicators or predict spot market prices in advance. Bitcoin futures, however, either follow spot market prices or trade at a significant premium or discount.
  • The regulatory landscape for bitcoin futures trading is still unclear. As mentioned above, there are very few exchanges that offer regulated futures trading. Bitcoin futures trading offered at exchanges located outside the United States do not come under the purview of agencies situated in the country. Such situations have the potential for profits through regulatory arbitrages, but they can also result in exponential risk.
  • The price for bitcoin futures is dependent on the price of a volatile underlying asset. While there is a theoretical formula to calculate the price of bitcoin futures, several other factors come into play in a real-world scenario. Investor perception of an asset’s volatility is one. Big news events are another. With its massive price swings and bubbles, Bitcoin already has a reputation among investors for price volatility. And there is no dearth of commentary about a cryptocurrency that was originally designed to become a medium for daily transactions but has, so far, failed to fulfill that promise. All of this means that bitcoin futures are not an effective hedge against their underlying asset’s volatility.

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