How to Get Started with Bitcoin Futures Trading
Posted On May 11, 2023
Bitcoin futures are contracts that allow traders to speculate on the future price of Bitcoin without having to own or store the cryptocurrency. Bitcoin futures can be used for hedging, arbitrage, or taking advantage of market movements. We will explain what Bitcoin futures are, how they work, and where you can trade them.
What are Bitcoin futures?
Bitcoin futures are standardized contracts that trade on regulated exchanges, such as the Chicago Mercantile Exchange (CME) or the Intercontinental Exchange (ICE). Each contract represents a certain amount of Bitcoin (for example, 5 BTC on CME or 1 BTC on ICE) and has a specified expiration date. The price of the contract is determined by the supply and demand of the market participants.
When you buy a Bitcoin futures contract, you agree to buy or receive Bitcoin at a predetermined price on a future date. When you sell a Bitcoin futures contract, you agree to sell or deliver Bitcoin at a predetermined price on a future date. You can close your position before the expiration date by taking an opposite position in the same contract.
The difference between the price at which you enter and exit the contract is your profit or loss. For example, if you buy a Bitcoin futures contract at $30,000 and sell it at $35,000, you make a profit of $5,000. If you sell a Bitcoin futures contract at $30,000 and buy it back at $35,000, you incur a loss of $5,000.
How do Bitcoin futures work?
Bitcoin futures are cash-settled, which means that no physical delivery of Bitcoin takes place. Instead, at the expiration date, the contract is settled by paying or receiving the difference between the contract price and the spot price of Bitcoin (the current market price).
The spot price of Bitcoin is determined by a reference rate that is calculated by aggregating the prices from various cryptocurrency exchanges. For example, CME uses the CME CF Bitcoin Reference Rate (BRR), which is based on the prices from Bitstamp, Coinbase, Gemini, itBit, and Kraken. ICE uses the Bakkt Bitcoin (USD) Spot Index, which is based on the prices from Bitfinex.
To trade Bitcoin futures, you need to have an account with a futures commission merchant (FCM), which is a broker that is authorized to trade on regulated exchanges. You also need to have enough margin in your account to cover your potential losses. Margin is a percentage of the contract value that you have to deposit as collateral. The margin requirements vary depending on the exchange and the contract.
For example, CME requires an initial margin of 37% and a maintenance margin of 33% for its Bitcoin futures contracts. This means that if you want to buy one contract (worth 5 BTC) at $30,000, you need to have at least $55,500 in your account ($30,000 x 5 x 37%). If the price of Bitcoin drops below $27,273 ($30,000 x 5 x 33%), you will receive a margin call and have to deposit more funds or close your position.
Where can you trade Bitcoin futures?
There are several platforms where you can trade Bitcoin futures, depending on your preferences and needs. Here are some of the most popular ones:
– CME: The largest and most liquid platform for trading Bitcoin futures. CME offers monthly contracts with a minimum tick size of $5 and a contract size of 5 BTC. CME also offers micro Bitcoin futures with a minimum tick size of $0.50 and a contract size of 0.1 BTC.
– ICE: The platform that operates Bakkt, which offers daily and monthly contracts with a minimum tick size of $2.50 and a contract size of 1 BTC. Bakkt also offers options on its monthly contracts.
– Bitfinex: A cryptocurrency exchange that offers perpetual contracts with a minimum tick size of $0.01 and a contract size of 0.001 BTC. Bitfinex also offers options on its perpetual contracts.
– Binance: A cryptocurrency exchange that offers quarterly and perpetual contracts with a minimum tick size of $0.01 and a contract size of 0.001 BTC. Binance also offers options on its quarterly contracts.
Bitcoin futures are an exciting way to gain exposure to the cryptocurrency market without having to own or store Bitcoin. They can help you hedge your risk,