How to trade Bitcoin futures – A comprehensive guide

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Derivatives trading for Bitcoin arrived in the US at the end of 2017. It’s safe to say the development of the crypto industry has had a significant boost thanks to the appearance of futures and options trading.

In today’s post we will discuss how to trade Bitcoin futures, what exchanges support this and last but not least, how they work.

What are futures?

A future is a type of financial product that works as an agreement to buy or sell an asset at a set price on a specific future date.

Once the futures contract is enabled, the participants will have to buy and sell at the set price as agreed regardless of the actual market price is at the contract’s execution date.

Futures are not necessarily focused on maximizing profit. You can think of them as risk management tools which financial markets often rely on to minimize the risk of changing prices for assets that are frequently traded.

Portfolios also use futures for volatile assets to control price fluctuations on investments. Futures contracts are traded and negotiated on a futures exchange.

How do futures contracts work?

A futures contract has two positions: long or short.

If you choose to take a long position, you accept to purchase an asset in the future at a fixed price when the contract expires. Opting for the short position means you agree to sell an asset at a set price when the contract expires.

You might be wondering why you would want to buy an asset at a fixed price or sell it for that matter. The answer is asset volatility.

If you know the asset’s price is expected to rise in the near future, by entering a futures contract you can ensure you will purchase it at a fixed, lower price. The seller can also benefit as the contract guarantees they have a steady market even though they will sell the assets at a lower price. And since volatility means the price could also go down the seller will be protected from that as well.

However, futures contracts are also used for speculation. An investor could choose the long position when the price of an asset is low. Should prices rise, the contract’s value will increase and the investor could trade the contract with another investor before it expires, at a higher price, of course.

What are Bitcoin futures?

Futures can be used for both physical and financial assets. In the case of Bitcoin futures, the contract will be based on Bitcoin’s price.  Investors can use futures to speculate on Bitcoin’s price without having to own actual Bitcoin.

Despite the efforts of governments worldwide to better outline crypto regulation we’re still far away from proper legislation. As Bitcoin is still unregulated, Bitcoin futures can be traded on regulated exchanges. As a result, those who are concerned about the incomplete or inexistent crypto regulation has Bitcoin futures as an option.

Also, Bitcoin futures allows those in areas where Bitcoin is banned to still speculate on its price.

The pros of trading Bitcoin futures

One of the main benefits of trading Bitcoin futures is it allows you to trade with more money than you actually own. Futures, option and other derivatives allow for leveraged trading. Leverage lets you borrow money for trades so, in theory, you could multiply your gains. However, if you end up in a loss that can also be multiplied.

Interestingly, Bitcoin future contracts are not actual Bitcoins so you don’t need to own any crypto assets. This eliminates all the risks associated with long or short-term storage of Bitcoin.

Depending on the network used, how busy it is and other factors, processing cryptocurrency transactions can take time. However, derivative contracts are processed instantly.

Bitcoin futures have extremely low fees. Purchasing $10,000 worth of crypto assets on an exchange means you’ll be subjected to fees ranging between $10 and $100 depending on the exchange.

In comparison, using a Bitcoin futures contract will result in fees of approximately 50 cents. Some brokerages that support Bitcoin futures trading even offer commission-free trading. They make most of their money by charging interest for margin loans which is why they can afford to offer zero percent commissions.

The cons of trading Bitcoin futures

All of the above sounds great! But nothing is perfect. For instance, some futures brokers ask for large initial deposits even in the range of tens of thousands of dollars. Also, if a futures contract starts to lose money, an exchange could ask the investor to add additional funds to keep the position.

Cryptocurrency trading platforms that offer futures and options trading have a wealth of options and advanced interfaces that take a lot of time to learn. Understanding and learning how to use them takes a significant amount of time compared to beginner-oriented crypto exchanges.

How to trade Bitcoin futures

A safe and easy way to learn how to trade Bitcoin futures is to use a sandbox trading environment. For the purpose of this tutorial we used the BitMEX exchange which has a great trading sandbox.

The first step is to create a free account on BitMEX’s testnet.  Once your account is created you will receive a small deposit of pretend money to invest.  To continue, click the Register button and follow the instructions.

BitMEX provides traders with ten types of futures contracts. Besides the standard Bitcoin contracts, you can use other options such as Bitcoin / Yen, Bitcoin Cash, Ethereum, Cardano, Bitcoin / Won, EOS Token, Ripple, Litecoin, Cardano, and Tron.

As you can see in the image above, the current Bitcoin contract is set to Perpetual. This means that payments are exchanges every 8 hours and the contracts you purchase will never expire.

Since the rate is currently positive investors with long positions will pay investors with short positions once the 8-hour period ends. If the position was negative then the short position investors would pay those with long positions.

(100x) means you can borrow as much as 100 times the amount of money in your account. In other words, the test account has given you 0.01 BTC as pretend money so you could theoretically invest 1 BTC in a position.

To initiate an order you will need to use the Place Order box on the left side of the interface. Beginners might want to place a market order instead of a limit order because market orders process faster compared to limit orders. To place a Market order make sure you’re positioned on the Market tab as illustrated in the image above.

To continue, enter the number of contracts you want to purchase in the Quantity box. You can also use the slider tool to adjust the amount of money you want to borrow.

With that out of the way, you can finally stake out a position. If you think that Bitcoin’s price will rise, select Buy Market. If you think that prices will go down, click Sell Market.

Before sending the order out to the exchange you can adjust the margin slider in the ‘Confirm Your Order’ box. ‘Cost @ 25x’ shows how much you paid for the order and the ‘Order Value’ field shows the total value of your order. You can see how much money you presently have in your account in the ‘Available Balance’ section.

In the bottom area of the UI, you’ll be able to track your position.

Practice makes perfect is the saying so the best way to master trading derivatives is to experiment and use various sandbox exchanges until you start making a profit. Then you can finally join a platform that provides Bitcoin futures trading and makes use of all the terms and features you used in the sandbox.

Exchanges for trading Bitcoin futures

Obviously, you’ll need to see some options before you start trading Bitcoin futures. For this reason, we compiled a list of exchanges that are available in the US and provides bitcoin futures trading.

BitMEX

The Bitcoin Mercantile Exchange, BitMEX for short, is a Hong-Kong-based company founded by former Citigroup and Deutsche Bank trader. BitMEX offers Bitcoin future trading with up to 100x leverage and markets itself as providing “The Next Generation of Bitcoin Trading Products”.

CBOE Futures Exchange

CBOE was, in fact, the first exchange to offer Bitcoin futures in the United States. According to their website, CBOE has used its “significant product development expertise to design an instrument that allows participants to implement trading strategies in a manner to which they are accustomed” when designing their XBT futures.

TD Ameritrade

TD Ameritrade is brokerage company based on Omaha that also provides Bitcoin futures trading. Among the benefits of trading on their platform, you will find straightforward pricing and 24/7 customer service.

ED&F Man

ED&F Man Capital Markets is the world’s largest hedge fund company and also a registered futures commission merchant. They started offering Bitcoin futures trading in July 2018 and after the launch, Vice President of ED&F Man Capital Markets, Brooks Dudley, declared:

“EFPs on CME Bitcoin futures mark an important step forward in the maturity of the regulated derivatives market for digital currencies.”

CME Group

CME Group is a U.S.-based financial market company that offers various advantages for Bitcoin futures trading such as diversified price sources, 24/7 trading access, deep market liquidity, and clearing services offered via CEM Clearing.

Advantage Futures

Advantage Futures offers Bitcoin futures trading through CBOE and CME Group. You can find more info here.

Straits Financial

Straits Financial provides “all the protections and transparency of The Chicago Board of Options Exchange and The Chicago Mercantile Exchange” as well as “state-of-the-art trading platforms”.

E-Trade

E-Trade is a New York-based brokerage firm that provides Bitcoin futures trading via CME since the beginning of 2018. The company provides flexible trading limits, minimal short selling restrictions, 24 hours a day / six days a week trading limits and professional trading tools.

Interactive Brokers

Interactive Brokers is a U.S.-based firm with offices all over the world that guarantees to deliver competitive commissions and “the best financial deal without the hassle of having to transfer between accounts.” Customers have the option to deposit their paychecks directly and use the available funds for investments.

TradeStation

Online broker TradeStation has a new interest sharing program among other trading benefits which also include reduced intraday margin rates and simplified low commission pricing.