Cryptocurrency futures, such as Bitcoin futures, are legal contracts for trading Bitcoin at a predetermined price and time, allowing investors to speculate on the future price of the coin. These instruments are advantageous because they enable trading on regulated exchanges, offer cash settlements without needing to own Bitcoin, and allow for short selling to profit from declining market prices.
However, they can be risky, and understanding market fluctuations is essential for success. Investors can trade Bitcoin futures on both unregulated platforms like Binance and Forex, as well as regulated exchanges like CBOE and CME Group. Bitcoin futures present a different investment avenue in the digital currency market, suitable for those willing to take on the challenge and understand the mechanisms of futures trading.
By now, you are all familiar with the usual cryptocurrency trading, directly buying and selling cryptocurrencies, such as Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), etc., but there is yet another type of cryptocurrency trading that involves using the futures of crypto coins, also known as cryptocurrency futures.
It would be an understatement to say that the launch of Bitcoin futures has had a considerable impact on the financial market. These distinctive financial instruments allow wise investors to take advantage of Bitcoin’s volatility, and at the same time, they don’t even need to hold any Bitcoins in their wallets. This makes Bitcoin futures perfect for big investment companies and those who want to avoid unregulated and volatile markets.
So, in this article, we’ll get into Bitcoin futures, how they work, and their advantages and disadvantages. In the end, we’ll present to you the best Bitcoin futures trading platforms that you can use if you decide to make this type of investment.
Let’s get started!
What Is Bitcoin Future?
Overall, Bitcoin futures are very similar to commodity and stock futures contracts. To put it in simple terms, Bitcoin futures are legal contracts for trading Bitcoin at a predetermined time and price of Bitcoin. Moreover, Bitcoin futures gives investors an opportunity to speculate about the future price of the coin.
In December 2017, the Chicago Board Options Exchange, or CBOE for short, launched the first Bitcoin futures contract, closely followed by the Chicago Mercantile Exchange Group (CME). The CME Group offers monthly futures contracts for fiat currencies, such as USD, meaning that the investors can receive fiat cash instead of BTC, according to the settlement of the Bitcoin futures contract.
How Does Bitcoin Futures Work?
When it comes to the way that Bitcoin futures work, you can take one of the following positions:
- Long position – meaning that you buy Bitcoin when the futures contract expires, at a particular predetermined price;
- Short position – meaning you have agreed to sell your BTC when the futures contract expires, at a particular predetermined price.
We know it might sound a little bit confusing, so we’ll try to explain how Bitcoin futures work through an example. Let’s say that you own three bitcoins that are priced at 15,000 US dollars each, and you anticipate that the price of Bitcoin is going to rise by the beginning of the next month.
However, you want to protect your investment in case Bitcoin goes down. In order to do this, you can buy a Bitcoin futures contract to sell one of the bitcoins at the beginning of the next month.
So if at the beginning of the next month Bitcoin has gone up, you’ll make a profit by selling the remaining two bitcoins, and if it goes down, you’ll lose some money, but the loss will be limited because you have protected one Bitcoin with a Bitcoin future contract and you can sell it for 15,000 USD.
We’ve given you a simple example of how a Bitcoin futures contract works, but the specific terms of each futures contract can be very complex. This depends on the trading platform that you choose, and this platform is going to include the maximum and the minimum limits of the price of Bitcoin that you can buy or sell.
The Advantages of Bitcoin Futures
Bitcoin futures have numerous advantages that they offer for better cryptocurrency trading. Let us show you how investing in Bitcoin futures isn’t that complex after all.
Trading on Regulated Exchanges
This might be the most important advantage of Bitcoin futures, as instead of trading on cryptocurrency exchanges that are unregulated, you trade on licensed and regulated platforms, such as Coinbase, Kraken, CME, CBOE, and Bakkt. These trading platforms are regulated directly by the Commodity Futures Trading Commission.
Regulated platforms are far more secure than unregulated currency exchanges, such as Binance. In the past, investors have sustained great losses due to security breaches or hacks on some of the unregulated cryptocurrency exchanges.
Another crucial advantage of Bitcoin futures that attracts investors is the fact that the settlement is in cash. This is because futures contracts don’t involve any direct exchange of Bitcoin.
Basically, the trading platform and the investor never really own Bitcoin during the transaction, but rather, they have a contract for trading Bitcoin in the future for a determined trading price.
A big plus for Bitcoin futures is that in order to invest, you don’t need any software that supports cryptocurrencies or as a matter of fact even a Bitcoin wallet.
Bitcoin futures give the market the opportunity to go short. But, what is shorting? Simply put, shorting is when the investors participate in a trade with a predetermined goal to earn money from the decreasing market price of an underlying asset.
Due to the fact that the Bitcoin futures price is updating on a daily basis, you can short Bitcoin futures by buying back your futures contract for a lower price.
The Disadvantage of Bitcoin Futures
Like everything else, Bitcoin futures have their own disadvantages. First off, investing in them is quite risky. In some cases, the price of Bitcoin might drop, and the investor will be stuck with a futures contract that is overpriced.
Another downside of Bitcoin futures is that only an investor with a lot of experience can leverage futures properly.
It’s crucial for you to have a good understanding of the crypto market fluctuations and cycles in order to earn a decent income from trading Bitcoin futures.
Bitcoin Future Trading Platforms
There are two options that you can use to trade Bitcoin futures.
The first one is to use cryptocurrency exchanges where the trading of Bitcoin futures is somewhat unregulated. Here are some good options:
The second option that you can use for trading Bitcoin futures is the publicly regulated exchanges, such as:
- CBOE – one of the biggest futures exchanges, and the first one that launched Bitcoin futures trading in December of 2017;
- CME Group – a derivatives and futures exchange settled in Chicago that followed the launch of Bitcoin futures trading soon after CBOE;
- TD Ameritrade – the biggest brokerage firm in the world;
- Nasdaq – a reliable stock market exchange;
- Bakkt – a Bitcoin futures exchange backed up by the International Exchange (ICE) and owned by NYSE.
A Few Words Before You Go…
We hope we managed to teach you something new about digital currency trading by introducing you to Bitcoin futures contracts, another interesting way to invest in the cryptocurrency market.
Now you know how these futures contracts work and how to use them to your benefit. Hopefully, learning about their advantages and disadvantages can help you decide whether futures trading is right for you.
So, if you are a little bit curious and if all of this seems like a fun challenge for you, do some more research and give Bitcoin futures a go.