What Are Bitcoin Futures and How to Trade
In 2024, Bitcoin is having a strong year. On Oct. 15, 2024, the cryptocurrency's open interest hit $19.8 billion, according to CryptoQuant data, illustrating its rising demand. Behind this surge are Bitcoin Futures, with the Chicago Mercantile Exchange (CME) as the leading exchange to trade this growing product.
But what are Bitcoin Futures? What are their pros and cons? Are they risky? Read on to learn more.
What are futures
Futures are financial contracts that obligate the buyer to purchase, or the seller to sell, an asset at a predetermined price on a specific future date. These contracts are standardized and traded on futures exchanges, such as CME, used by some traders for hedging (to protect against price fluctuations) and speculation (to profit from anticipated market movements).
What are Bitcoin Futures
Bitcoin Futures are financial contracts that allow traders to speculate on the Bitcoin future price without having to actually own the cryptocurrency. These contracts require the buyer to purchase Bitcoin, or the seller to sell Bitcoin, at a predetermined price on a specific future date. Bitcoin Futures are traded on regulated exchanges like the CME and other platforms.
Why investors trade Bitcoin Futures
Investors can trade Bitcoin Futures for many reasons. They allow traders to speculate on the future price movement of Bitcoin without owning the underlying asset. With leverage, investors can control large positions with less capital, potentially amplifying returns (though this also increases risk). Investors who also believe Bitcoin will rise in value can purchase futures to potentially benefit from price appreciation, while those anticipating a decline can short Bitcoin Futures to profit from a falling market.
However, the volatility of Bitcoin and the use of leverage mean that trading futures can be risky, especially for inexperienced traders.
Crypto Futures history
After the Chicago Board Options Exchange (CBOE) and the CME launched regulated Bitcoin Futures contracts, crypto futures gained traction in 2017. This enabled investors to speculate on Bitcoin future price without owning Bitcoin.
CBOE doesn't have a Bitcoin Futures product anymore, but CME's futures contracts have taken off. These futures contracts enable traders to hedge against price volatility and speculate on price movements, providing a way to manage risk and potentially profit from market fluctuations.
Where to trade Bitcoin Futures
Investors can trade Bitcoin Futures, as well as other cryptocurrency futures, on several regulated and unregulated platforms. Each of these platforms has different features, fees, and regulatory environments, so choosing one depends on your location, trading experience, and risk tolerance as well as what leverage a platform offers, fees, security, and supported assets. Some platforms, like CME and Bakkt are more secure and regulated, while others like Binance and Bybit offer more leverage but operate in less regulated environments.
How to trade Bitcoin Futures
Trading Bitcoin Futures involves speculating on the future price of Bitcoin without owning the actual cryptocurrency. This is an independent decision for investors whether or not they chose to trade Bitcoin Futures, but here are some considerations when exploring whether or not to trade them and some possible steps.
Choose a platform by selecting a regulated exchange by the CFTC or a crypto-specific exchange that is not subject to the same regulatory requirements as traditional exchanges but offer Bitcoin Futures. Some of the leading platforms are the regulated CME for institutional traders; Unregulated Binance and Bybit, OKX, Kraken Futures for retail and crypto enthusiasts, and Bakkt for physically-settled Bitcoin Futures.
Sign up for an account on your chosen platform and complete identity verification (if required). For regulated platforms like CME or Bakkt, you may need to provide additional documentation due to financial regulations.
Deposit the required capital to trade Bitcoin Futures. Depending on the platform, you can fund your account with fiat currency (e.g., USD) or cryptocurrencies.
Bitcoin Futures are typically traded on margin, meaning you only need to deposit a fraction of the contract's total value (the margin requirement). Most platforms also offer leverage, allowing you to control a larger position than your capital would allow (e.g., 5x, 10x, or even up to 100x leverage). Keep in mind that leverage magnifies both gains and losses.
Decide whether to trade standard futures contracts which settle on a fixed future date or perpetual contracts that don't have an expiration, but involve periodic funding fees between buyers and sellers.
Stay updated on Bitcoin news and regulatory changes that may impact your futures' position. Keep in mind that crypto is generally much more volatile and to conduct technical or fundamental analysis, they may not adhere to established analysis methods and indicators when following stocks.
Choose to buy (go long) if you believe Bitcoin's price will rise or sell (go short) if you expect the price to fall (note this is more risky with potential for unlimited losses). You can enter different order types such as a market order, limit order or a stop-loss order.
Once your position is open, monitor its performance regularly. Adjust your stop-loss or take-profit levels to help manage risk.
Depending on the contract type, you may either close your position before expiration to realize profits or losses. You can also allow it to expire, after which the contract will either settle in cash (CME, Binance Futures) or settle in physical Bitcoin (Bakkt).
Some platforms charge maker/taker fees for placing orders, and for perpetual contracts, you may need to pay or receive funding rates based on the difference between the spot and futures price.
Trading on regulated or unregulated exchanges
The distinction between regulated and unregulated Bitcoin futures exchanges lies in the level of oversight, security standards, and investor protections provided. For regulated Bitcoin futures exchanges, they operate under the oversight of governmental or financial regulatory bodies, which enforce rules to ensure transparency, security, and fair practices. This regulatory framework makes them particularly attractive to institutional and cautious retail investors. CME, Bakkt (owned by Interncontinental Exchange), and ErisX (part of Cboe Digital) are examples.
Regulated Bitcoin Futures offer greater security, transparency, and legal protections, making them a more reliable option for traders who want to minimize risk.
Unregulated exchanges often do not have centralized oversight or adhere to the same compliance standards, which can provide more flexibility but also increases the risk. While they tend to have higher leverage and more diverse trading options, they are more vulnerable to market manipulation and may offer limited recourse in case of disputes or security breaches.
Binance, ByBit and OKX are examples of unregulated exchanges.
Unregulated Bitcoin Futures carry higher risks due to a lack of oversight, making them suitable only for traders who can tolerate higher volatility, leverage, and potential legal issues.
Potential benefits and risks of Crypto Futures
Potential benefits
A big attraction of crypto futures is leverage as traders can control larger positions with a smaller initial capital investment. For example, with 10x leverage, a trader can control $10,000 worth of Bitcoin with only $1,000. This allows for potentially larger profits.
Futures allow traders to short cryptocurrencies, meaning they can potentially profit from falling prices. This can be especially useful in the volatile crypto market where prices can fluctuate dramatically.
Investors can use futures to hedge against potential short-term price declines in their crypto holdings.
Platforms like CME offer regulated Bitcoin Futures, which provide a level of security and trust for institutional investors. This has attracted both retail and institutional traders into the space.
Bitcoin futures markets tend to have high liquidity, enabling traders to enter and exit positions more easily without significant price slippage, especially on larger exchanges like Binance, OKX, and CME.
Given the volatility in cryptocurrency prices, traders can potentially take advantage of short-term price movements to make significant gains, especially with leveraged futures.
Potential risks
While leverage can potentially increase profits, it also amplifies losses. A small price movement against a trader's position can lead to significant losses, even beyond their initial investment if not managed properly. It is important for traders to keep eyes on their account balances. When trading on margin, if the value of the position falls below a certain threshold, the trader may face a margin call. If they are unable to meet the margin requirement, their position may be liquidated at a loss.
Cryptocurrencies are highly volatile, potentially leading to large swings in futures contracts prices. Unpredictable price movements make trading futures risky, especially for those without a solid risk management strategy.
Trading futures, especially with leverage, require a deep understanding of risk management, technical analysis, and market timing. Less experienced traders may find it challenging and could quickly lose money without proper education and experience.
Cryptocurrencies operate in a rapidly evolving regulatory environment. Government policy or regulatory changes could impact the futures market, including restrictions or bans on trading futures contracts.
Trading on unregulated crypto exchanges carries counterparty risk. In case of exchange failure, security breaches, or insolvency, traders could lose their funds (e.g. FTX).
With perpetual futures, traders must pay or receive funding fees depending on whether their position is long or short. These fees can add up, especially for long-term positions, reducing profitability over time. Keep in mind that the fact that cryptocurrency values change 24/7. Trading hours for Bitcoin Futures are Sunday through Friday, from 5 p.m. to 4 p.m. Central Time (CT) on CME but they can also trade 24/7.
Bitcoin Futures vs. other futures
The main differences between Bitcoin Futures and other futures contracts like commodities (e.g., oil, gold), stock index futures, or agricultural futures (e.g., wheat, corn) lie in their underlying assets, market dynamics, and investor behavior.
Bitcoin Futures offer exposure to the cryptocurrency market, but come with higher volatility, leverage, and regulatory uncertainty compared to traditional futures markets. Other futures provide more stability and liquidity, with clearer regulation and a more mature market environment.
Each type of future serves different investment and trading purposes, depending on the trader's risk appetite and market objectives.
Bitcoin Futures vs. Bitcoin ETFs
Bitcoin Futures and Bitcoin ETFs are both financial instruments that offer exposure to Bitcoin, but they differ significantly in structure, trading mechanics, and risk profiles.
Bitcoin Futures are better suited for experienced, speculative traders looking to capitalize on short-term price movements who are more comfortable with leverage and margin calls. Bitcoin ETFs are aimed at longer-term investors seeking simpler, regulated exposure to Bitcoin without the need to own the cryptocurrency or manage futures contracts.
FAQs About Bitcoin Futures
Is there a futures market for Bitcoin?
Yes, there is a futures market for Bitcoin. Bitcoin Futures are traded on regulated exchanges like the CME and previously on the CBOE, which launched the first Bitcoin Futures contracts in late 2017. These futures allow investors to speculate on the future price of Bitcoin without needing to own the cryptocurrency itself.
Can Bitcoin Futures affect the price of Bitcoin?
Yes, Bitcoin Futures can potentially affect the price of Bitcoin, but they do not directly affect the spot price of Bitcoin (since no actual Bitcoin is traded in cash-settled futures). Bitcoin Futures can influence market sentiment, arbitrage behavior, and liquidity, all of which can indirectly impact Bitcoin’s price.
Do Bitcoin Futures pay dividends?
No, Bitcoin Futures do not pay dividends. Dividends are typically paid out by companies to shareholders as a portion of their profits, but Bitcoin itself is not a company—it is a decentralized digital asset with no earnings to distribute. Since futures contracts are derivative products based on the price of Bitcoin rather than ownership of the asset, there are no dividends associated with Bitcoin Futures.
Are there minimum investment requirements for Bitcoin Futures?
Yes, there are minimum investment requirements for trading Bitcoin Futures, which vary depending on the exchange and the contract specifications. On regulated exchanges like CME, the contract size for each Bitcoin Futures contract represents five Bitcoin. Traders must maintain a margin to hold positions and the initial margin requirement (the amount needed to open a position) is approximately 35-40% of the contract's value. This amount fluctuates depending on market volatility. Traders must also keep a maintenance margin, which is slightly lower than the initial margin, to continue holding the position.
On cryptocurrency exchanges (e.g., Binance), some may offer mini futures with smaller contract sizes, such as 1 Bitcoin. These platforms also often offer leverage, which means you can control larger positions with smaller investments. Margin requirements can be as low as a few percent, but high leverage also increases risk.
