The cryptocurrency space is gradually entering into its maturing phase and Bitcoin Futures is the latest proof to that. So, what is Bitcoin futures?
Bitcoin Futures Explained
Although futures have their presence in the financial markets for a long time now, they have recently made their entry into the crypto space as well. Essentially, Futures stands for an agreement to buy or sell a specific asset at a pre-determined price on a set date in the future.
When it comes to the popular cryptocurrency, Bitcoin Futures refers to an agreed contract to buy or sell bitcoin at a fixed price on a future date.
The Futures contract allows users to speculate on the coin’s price in the future. Moreover, it enables the ability to trade in Bitcoin without actually owning or storing it.
Futures are an instrumental tool for protection against market or asset volatility. As bitcoin is highly volatile by nature, futures allow an individual to mitigate risks and/or take advantage of the price movements of Bitcoin.
How Does Bitcoin Futures Work?
Bitcoin Futures are more of a crypto-gamble. More specifically, an individual places a ‘bet’ on the price of Bitcoin.
Speculators have two options:
- Either to go long – buying Bitcoin at a predetermined price,
- or go short– selling Bitcoin at a predetermined price
Let’s see how this works in an example.
Let’s suppose that an investor owns 5 bitcoins at $9000. He has decided to go short (selling bitcoin) on a specific date in the future at $9000. Closer to the expiry date of the contract, if the price of bitcoin drops to $7000, the investor still won’t incur any losses. The futures contract ensures that the investor can mitigate risks associated with the price volatility of bitcoin.
Alternatively, let’s say that closer to the expiry date of the contract, the investor decides to go long (buying bitcoin) when the price has dropped to $7000. If the contract trades for $9000, the investor would have $2000 in profits by buying low and selling high.
The minimum investments and contractual terms differ for each exchange. However, in any case, the investor need not buy or store bitcoins. Additionally, bitcoin futures allow an investor to make profits by speculating on the price movements and not on the rise or drop of one BTC.
Bitcoin Futures Trading Advantages
The advent of bitcoin futures in the cryptocurrency industry is seemingly a step forward. There are a number of advantages to bitcoin futures trading as a financial instrument.
- Regulation – The contracts are traded on regulated exchanges thus driving mass adoption with institutional investors. Moreover, the aspect of regulation gives a chance for individuals to invest in Bitcoin and offer additional protection against fraud.
- Speculation – Bitcoin futures contracts allow individuals to trade BTC without having to own or store it. This is an advantage for investors who do not understand the complexities associated with storing the popular cryptocurrency.
- Leveraged Trading – At the moment of this writing, Bitcoin is highly volatile. The aspect of leveraged trading helps the investor to benefit from price movements and also mitigate risks.
- Wider adoption – Bitcoin futures brings a stream of institutional investors that would further drive liquidity into the markets.
Where Can I Trade Bitcoin Futures?
In December 2017, the Cboe became the first exchange to offer Bitcoin Futures contracts on its platform. In the same month, another exchange, CME (Chicago Merchantile Exchange), started offering Futures contracts, providing investors greater exposure towards the Bitcoin asset class.
Both the exchanges are regulated by Commodity Futures Trading Commission (CFTC) and are the largest exchanges offering BTC Futures contracts.
Last year, in 2019, Bakkt also started offering physical delivery based Bitcoin contracts on its platform. Major cryptocurrency exchanges have now started providing Futures options as well.
What is Bitcoin Futures CME?
The CME (Chicago Merchantile Exchange) is one of the largest Bitcoin Futures exchange. The settlements are either cash-based or made in U.S dollars.
The execution price or the settlement of the contract is based on CME CF Bitcoin Reference Rate (BRR), which is calculated on a daily basis at 4.00 P.M. London time.
While the cryptocurrency markets are open round-the-year, CME is open 6 days per week from Sunday to Friday. Due to greater volatility, the margin rates for a CME’s contract are as high as 35%.
The minimum contract unit consists of 5 BTC, while contracts can go up to 100 Bitcoins. The contracts expire on the nearest 2 months in the March quarterly cycle (March, June, September, December) and the nearest 2 months outside of the quarterly cycle.
How to Buy Bitcoin Futures?
An individual choosing to invest in bitcoin futures should consider whether the reason for investing is purely speculative or to hedge risk.
The buying and selling for Bitcoin Futures, along with the margins and contract terms, are different for each exchange. In the case of CME, the trading is done via its own website and through intermediary brokers.
For any individual looking to buy Bitcoin Futures, it is important to research the different contractual terms offered by exchanges.
Moreover, an investor should also understand the complete risks associated with leveraged trading. An individual should understand the volatility of bitcoin prices before choosing to make an investment in the market.
However, it is undeniable that bitcoin futures have given a broader dimension to the cryptocurrency market. Moreover, the entry of regulated exchanges has given it an institutional makeover to bitcoin investments.