Cryptocurrency Futures Definition

What Are Cryptocurrency Futures ?

Cryptocurrency futures are contracts between two investors that bet on a cryptocurrency ‘s future price. They allow investors to gain exposure to select cryptocurrencies without purchasing them. Crypto futures resemble standard futures contracts for commodities or stocks because they allow you to bet on the price trajectory of an underlying asset .

Cryptocurrency futures trade on the Chicago Mercantile Exchange and cryptocurrency exchanges.

The first Bitcoin futures contracts were listed on Cboe in early December 2017, but soon discontinued them. The Chicago Mercantile Exchange ( CME ) introduced Bitcoin futures contracts in December 2017 as well. The contracts trade on the Globex electronic trade platform, are settled in cash. Bitcoin and Ether futures are based on the CME CF Bitcoin Reference Rate and the CME CF Ether Reference Rate .

Key Takeaways

  • Cryptocurrency futures allow investors to speculate on the future price of cryptocurrencies.
  • Investors can choose from a variety of venues to trade monthly cryptocurrency futures. Some are regulated; others are not.
  • Cryptocurrency is known for its volatile price swings, which makes an investment in cryptocurrency futures risky.
  • You can trade cryptocurrency futures at brokerages approved for futures and options trading.

Understanding Cryptocurrency Futures

Futures contracts of any underlying asset are derivatives of that asset. These contracts are bought and sold between two commodities investors, and they speculate about that asset ‘s monetary value at a particular go steady in the future .

The contracts have a particular number of units, price, bare requirements, and settlement methods that investors must meet .

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, 5 p.m.– 4 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

contract details for ETH futures at CME :

  • Contract unit: 50 ether, as defined by the CME CF Ether Reference Rate
  • Price quotation: USD
  • Trading hours: Sunday–Friday, 5 p.m.– 4 p.m.
  • Product code: ETH
  • Margin requirements: 60% cash of the contract amount
  • Listed contracts: Contracts listed for six consecutive months and two additional Decembers
  • Settlement method: Financially settled

How Crypto Futures Work on Regulated Exchanges

Consider the follow case for a CME Group Bitcoin futures compress. Suppose an investor purchases two Bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin when the futures contract was purchased was $ 5,000 each, totaling $ 50,000 for both futures contracts. The margin prerequisite for Bitcoin futures trade at CME is 50 % of the contract sum, mean that the investor has to deposit $ 25,000 as allowance. They can finance the stay of the compress leverage by using leverage .

The contract ’ s value varies based on the underlying asset ‘s price ( i, Bitcoin ). CME uses the Bitcoin Reference Rate, which is the volume-weighted modal price for Bitcoin sourced from multiple exchanges and is calculated casual between 3 post meridiem and 4 post meridiem London time .

To trade futures, you ‘ll need to have an explanation with a registered futures commission broker or introducing broker. Depending on Bitcoin ’ randomness 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 choice to either roll them over to new ones or let them expire and collect the cash settlement due .

The steps to conduct trade in Bitcoin futures are the same as those for a even futures contract. You begin by setting up an account with the brokerage house or exchange where you plan to trade. once your account is approved, you will need another approval to start futures trading from the trade military service provider. broadly, the latter approval is a affair of financing requirements and the explanation holder ’ s have with derivatives trading.

The lapp criterion besides play an essential character in determining leverage and margin amounts for your trade. Futures trading makes big use of leverage to execute trades. government agencies regulate the maximum leverage total allowed at determine exchanges and trade venues,

How Crypto Futures Work on Unregulated Exchanges

The report is a different one at unregulated exchanges. They have the freedom to allow excessive risk-taking for their trades. For exemplar, Binance offered leverage of up to 125 times the deal amount when it launched futures trading on its platform in 2019. That design was revised to 20 times the trade amount in July 2021. Remember that higher leverage amounts translate to more volatility for your trade wind. Thus, the promise of high profits is offset by the risk of losing significant amounts of money.

The measure you can trade depends on the margin sum available to you. Margin is the minimal collateral you must have in your report to execute trades. The higher the total of the barter, the greater the margin total required by the agent or substitute to complete the craft.

Bitcoin ’ second bad and volatile nature means that the allowance amounts required for trading their futures are generally higher than those for other commodities and assets. CME Bitcoin futures trading began with a 100 % margin, meaning traders had to put up the trade wind ’ s sum sum as allowance. As of April 2022, the switch over calls for a 50 % margin for Bitcoin and 60 % for Ether futures trade. Brokerages offer futures products from many companies, but they can have unlike margin requirements, one that is over and above the total charged by the supplier. For exemplar, CME has a base allowance requirement for Bitcoin futures ; brokerages like TD Ameritrade, which offers CME Bitcoin futures trading as part of their product suite, can set margin rates on top of the base rate set by the exchange .

Where Can You Trade Cryptocurrency Futures ?

The Cboe Global Markets ( Cboe ) was the first american exchange to offer Bitcoin futures contracts on Dec. 10, 2017. CME followed a workweek late. According to data from crypto analytics firm Skew.com, the most outstanding Bitcoin futures trading platforms in April 2022 were :

  • Binance: The world’s biggest cryptocurrency exchange by trading volume also accounted for a hefty $4.32 billion of the total trading volume in Bitcoin futures.  
  • Bybit: Started by a derivatives trading firm in 2018, and accounts for $2.30 billion of total Bitcoin futures trading volume.
  • CME: Headquartered in the United States, CME accounts for $2.24 billion of the total trading volume.  
  • FTX: A relative latecomer to the crypto trading ecosystem, FTX’s rise to popularity has been swift.
  • OKX: While it may not be as well-known as Coinbase Inc. (COIN) to U.S. audiences, OKX ranks among the world’s biggest cryptocurrency exchanges. Due to regulatory compliance reasons, OKX is not available to U.S. customers.

You can besides gain exposure to cryptocurrency futures by trading cryptocurrency ETFs. There are several Bitcoin ETFs that are linked to Bitcoin futures.

Advantages of Cryptocurrency Futures trade

The independent advantage of trading Bitcoin futures contracts is that they offer regulate exposure to cryptocurrencies. In a volatile ecosystem with godforsaken price swings, that is a meaning indicate. Bitcoin futures contracts at CME are regulated by the Commodities Futures Trading Commission ( CFTC ). This offers a measure of confidence and recourse to institutional investors, who comprise a majority of traders in such contracts.

simplicity

Bitcoin futures besides simplify the action of investing in Bitcoin. The investor does not need to create a Bitcoin wallet or put money into detention solutions for storage and security while deal because there is no physical Bitcoin exchange. An add benefit of cash-settled contracts is eliminating the risk of physical ownership of a explosive asset.

Safer Than Owning Crypto

Bitcoin futures contracts are relatively more condom for dabbling in Bitcoin without getting burn because futures contracts have position and monetary value limits that enable investors to curtail their risk exposure to the asset class.

position Limits

position limits differ between exchanges. For example, CME allows a maximum of 2,000 front-month futures contracts and 5,000 contracts across different maturities. Binance, the world ’ s biggest cryptocurrency exchange by trade book, has a position limit allowance feature of speech that enables manual reconfiguration of limits based on past trade history and allowance amounts .

The further out the futures narrow passing date is, the higher the account care sum will generally be.

special Considerations While Trading Cryptocurrency Futures

The numeral of venues offering cryptocurrency futures deal is specify, as are the numbers of participants and deal volumes compared to early commodities. This means that cryptocurrency futures trade has its own arrange of peculiarities.

trade volume

trade volumes in cryptocurrency futures can mimic those of its spot markets counterpart. Price fluctuations can besides be high, particularly during volatile stretches regarding price. During these times, cryptocurrency futures may appear to follow spot commercialize prices or trade at a meaning premium or dismiss to spot prices .

This means that Bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. The SEC warned investors about the pitfalls of deal cryptocurrency futures in June 2021. “ Among early things, investors should understand that Bitcoin, including derive exposure through the Bitcoin futures marketplace, is a highly inquisitive investment. ”

Most Exchanges are Unregulated

Except for choice deal venues, such as CME, cryptocurrency futures trading occurs chiefly on exchanges outside the horizon of regulation. Among the universe ’ second biggest platforms for Bitcoin futures, entirely CME is regulated by the CFTC. Binance and FTX, the universe ’ second second- and third-biggest platforms by trade volume, have opened U.S. subsidiaries only recently .

Cryptocurrency Futures Options

Cryptocurrency options are a relatively newly development. CME introduced deal in Bitcoin options in Jan. 2020 and Ether futures options in March 2022.

Cryptocurrency options work like criterion options contracts in that they are a right, and not an obligation, to buy cryptocurrency at a place monetary value on a future date. In this case, the asset is represented by cryptocurrency futures contracts traded at the CME, with a individual options contract equivalent to a single futures contract consisting of 5 BTC or 50 ETH. Options contracts for six consecutive months are available at a time at CME. They expire monthly on set dates, with two extra December narrow months.

Traders can buy call options if they think the price of Bitcoin will go up. alternately, a put choice is a bearish count that the cryptocurrency ’ mho price will decline. The gains and losses in both cases are different. In a call option, gains may be unlimited ( because the price can go up indefinitely ), while the losses are limited to the premium paid for the condense. In a put option, losses may be unlimited ( because the price may go down to zero ), while the gains are limited to the bounty paid for the options contract.

again, Bitcoin ’ mho monetary value excitability makes it a hazardous asset for options trade. The imply excitability of options contracts is high, meaning that the price of a single Bitcoin option is besides high. high prices can magnify trader losses .

Where Can I Short a Crypto in the U.S.?

You can short Bitcoin and Ether on the Chicago Mercantile Exchange or cryptocurrency exchanges authorized in the U.S .

Are Crypto Futures Legal in the U.S.?

Cryptocurrency futures are legal in the U.S. and can be traded on authoritative cryptocurrency exchanges or the CME using specific brokers. You can trade cryptocurrency futures options with brokers such as synergistic Brokers, Edge Clear, Ironbeam, or Tradestation .

What Is Futures Expiration In Crypto?

Bitcoin and Ether futures expire on the last Friday of the calendar month at 4:00 autopsy London time .
Investing in cryptocurrencies and other Initial Coin Offerings ( “ ICOs ” ) is highly hazardous and notional, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual ‘s situation is alone, a certified professional should always be consulted before making any fiscal decisions. Investopedia makes no representations or warranties as to the accuracy or seasonableness of the information contained herein .

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