Introduction To Bitcoin Trading Futures

bitcoin trading futures

The futures are an agreement between two counterparties to buy and sell a specific amount of an underlying crypto at a specific future price on a specific date.

Bitcoin is the largest cryptocurrency by market cap. Like other cryptocurrencies, it’s also incredibly volatile. In March 2020, for instance, Bitcoin’s price practically halved in just a few days as markets tumbled amid fear about the pandemic. By early September, it had rebounded from about $4,000 to highs of $12,000—before promptly crashing again, dipping under $10,000.

Spot trading—the practice of buying and selling Bitcoin—forces traders to exchange cryptocurrencies at their current prices. But what if there was a way to lock in that price of $4,000, picking up the Bitcoin a couple of months later? So even if Bitcoin’s price hit $12,000, the counterparty would have to deliver the Bitcoin purchase with $4,000.

There is! It’s called a futures contract. A futures contract is an agreement between two traders that obligates a trader to buy or sell an asset at a specific time, quantity and price. For example, you might enter an agreement in mid-March to buy one Bitcoin for $4,000 for August 30. You could also be on the other side of the deal, agreeing to selling a Bitcoin for a fixed price. If you’re a buyer, you want the trading price of Bitcoin to go up, as you will be able to buy the cryptocurrency at below market value, while sellers want the opposite, profiting if Bitcoin were to decrease in price.

The reason why you might trade Bitcoin futures as opposed to just, say, buying lots of Bitcoin worth $4,000 at the time, is that you don’t have to hold them yourself. 

Some crypto exchanges, such as OKEx, have lower trading fees for futures contracts, which means that traders can squeeze a bit more out of their accounts by using futures.

When entering a futures contract, there are three ways a trader can exit their position: offsetting, rollovers and expiry. Offsetting is the most common, and occurs when a trader creates another futures contract with an equal value and size, making their effective obligations zero as they balance out. Rolling over is done by offsetting a position, but with an expiry date that is further into the future. Expiry is what you’d expect: it’s when a contract reaches its end date and the parties who hold the contract buy or sell at the agreed price.

Another trading method for futures is hedging. Hedging is a way to reduce risk, which is useful for traders dealing with the volatility of cryptocurrencies.

Consider a trader who just bought three Bitcoin at a $10,000 a pop:

Hedging reduces a trader’s overall risk, although it does also limit their potential profits.

First things first: Bitcoin futures are—by their very definition—speculative investments. In its decade-plus year history, Bitcoin has proven that the only constant is price volatility, and while the famed cryptocurrency might be on a bull run now, there’s no telling what tomorrow might bring for Bitcoin. If you speculate at the wrong time, you could be left stranded with a future asset that just isn’t worth it.

There’s also something to be said for being an experienced investor. To successfully utilize futures, an investor needs to understand market behavior, have enough knowledge to pay attention to reasonable market predictions, and enough sense to discard unfounded claims. Ultimately, Bitcoin futures are speculative, but it is possible to leverage good information on a best effort basis. Doing that, however, is not exactly easy, so one might argue that Bitcoin futures are not very accessible for the average person.

The inverse of this is that Bitcoin futures are a great way of getting ahead of a positive market price. If an investor times it right, there could, at least hypothetically, be major profit to be had by leveraging the Bitcoin Futures market.

Bitcoin futures also—counterintuitively—don’t involve holding any Bitcoin whatsoever. Instead, it simply involves trading Bitcoin at a future, pre-agreed upon date, whatever the price at that time may be. Understanding the market might not be the most accessible task, but you don’t even need an ounce of technology to get involved, not even a Bitcoin wallet.

Bitcoin futures are settled with cash. Because no active Bitcoin trading takes place in a futures market, agreements are satisfied by trading at future, pre-agreed prices. Another oft-cited advantage of the Bitcoin futures market is that the possibility of settling in cash means that no complex software or technological expertise is really necessary in order to get involved in this arena.

One aspect of Bitcoin futures is margin trading, which essentially means that an investor only requires a percentage of a contract’s total in order to participate.

Leveraging 10-20% of a Bitcoin future means that an investment has both a high potential for profit, but also for a loss.

“Shorting” is an investment strategy that involves entering into an investment with the intention of generating profit by waiting for a drop in an asset’s market value. Futures and their value are in constant flux, so there are plenty of opportunities for a savvy investor to short on their Bitcoin future at any time.

For example, say the Bitcoin market is in the middle of a 2017-esque crypto winter. An investor can continue to repurchase their future, and then conceivably generate a profit for themselves.

Bitcoin futures are traded on several platforms. The top five by open interest at the time of writing are OKEx, Binance, CME, ByBit, and BitMEX.

The world of Bitcoin futures isn’t all fun and games. Taking on a contract is a serious obligation, and if it reaches its expiry date, the trader has a legal obligation to fulfill it.

Futures could lose you a lot of money, as you could be forced to buy Bitcoin way above its current trading price. Cryptocurrencies are one of the most volatile asset classes available; as with all cryptocurrencies, trading Bitcoin is very risky.

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