Beginners Guide to Bitcoin Futures

Jun 14, 2022

Written by:
John McDowell

What are Bitcoin futures?

As with other assets like commodities or stocks, you can invest in the future prices of cryptocurrencies. Bitcoin futures allow you to make a bet on the future trajectory of its price, without ever having to buy any Bitcoin directly.

Bitcoin futures contracts are built on speculation. Traders can use tools like technical analysis to trade these futures based on previous support and resistance areas for Bitcoin. Due to how expensive the cost of a Bitcoin has become, futures contracts have become a popular way to trade the blue-chip crypto token.


How do Bitcoin futures work?

Bitcoin futures work exactly like any other futures contract for a tradable asset. It is a regulated trade between two traders that agree upon a specified price by a predetermined date. The trade takes place on a centralized exchange like the Chicago Mercantile Exchange or a crypto exchange like Binance or FTX.

Rather than buying or selling actual Bitcoin, futures contracts allow crypto traders to potentially profit off of the direction of the price of the underlying asset. To start, the buyer selects an expiration date and the units per contract. This signifies how many Bitcoin tokens the contract is actually worth. This varies from exchange to exchange. The CME issues contracts in denominations of 5 BTC each, while other exchanges will use much smaller amounts.

Crypto exchanges will also allow traders to use leverage to increase their trading size. Some exchanges will allow traders to use up to 100x leverage to really beef up their profits, or losses. Remember, as with most leverage, if the trade goes against you it could be an expensive mistake to make.

Pros and Cons of Bitcoin futures

Pros of Bitcoin Futures

  • One great thing about BTC futures is that it’s a way to trade Bitcoin without ever having to buy the asset itself. If you can predict the price action for Bitcoin, you are profiting off of the price movement and not the underlying fundamentals of the project itself.
  • If you want to roll the dice and trade Bitcoin futures using leverage at a centralized crypto exchange, you have the potential to make some rather large profits.
  • Trading Bitcoin futures provides the opportunity to make a profit on Bitcoin whether the price of the underlying asset goes up or down.

Cons of Bitcoin Futures

  • Trading Bitcoin futures can be risky, especially when using leverage. As high as your gains can be, so too will your losses if the trade goes against you.
  • To trade with leverage you do need to put up some initial margin. If you get liquidated you could lose everything in your trade as well as your initial margin amount as well.
  • While it has somewhat stabilized over the past couple of years, Bitcoin and cryptos, in general, are still relatively volatile assets.

How safe are Bitcoin futures?

Derivative instruments are inherently riskier than trading the underlying asset and Bitcoin futures are no different. You can argue about Bitcoin’s actual volatility versus its perceived volatility, but there is no denying that it is riskier than other assets like blue-chip stocks or ETFs.

The riskiest part about Bitcoin futures is that they are speculative on the future movement in prices. In an unpredictable crypto market that trades 24 hours per day, seven days per week, price action does not always go according to plan.

In terms of actually placing a Bitcoin futures trade on an exchange, the action of buying and selling itself is relatively safe. But the fact that you require some initial margin to trade against means that there is a very real potential that your losses will be higher than even your initial margin amount.

Are Bitcoin futures cash settled?

This depends on where you trade your Bitcoin futures contracts. The CME offers cash settlements for Bitcoin futures trades. Certain crypto trading exchanges do allow physical delivery of a settlement in Bitcoin instead of fiat cash, but generally, most exchanges will carry out a cash settlement.


When do Bitcoin futures expire?

Since the crypto markets trade around the clock and on weekends, there has to be a set date at which the futures contracts expire. Generally, the rule is that Bitcoin futures contracts expire at 4:00 pm London Time on the last Friday of every month. However, BTC futures contracts trade Sunday through Friday, from 5 p.m. to 4 p.m. Central Time on the CME.

Similar to OPEX or Options Expiry day in the traditional stock market, the Bitcoin Futures Expiry date does see some unusual volume. While neither event has been proven to have a direct impact on stock prices or the price of Bitcoin itself, there is generally higher trading volume and perhaps even some hedging taking place.

Bitcoin futures margin

To trade Bitcoin futures contracts you will need to put up a certain amount of collateral to borrow margin against. The amount of money you need to have to borrow leverage depends on where you are trading from. The CME requires at least 50% of the contract amount that you are trading. Other less regulated exchanges might require less of an initial margin amount.

Is margin safe to trade with? When done correctly margin can be an incredible instrument to utilize to bring even larger potential gains from trading. However, trading with margin is often called a double-edged sword because it can provide steep losses just as easily.

Bitcoin futures vs. ETFs vs. Owning Bitcoin?

This is the age-old question of how to trade Bitcoin. In the end, this will always depend on your risk tolerance and investing horizon. There are pros and cons to all three forms of Bitcoin investing.

Bitcoin Futures

We already touched upon the pros and cons of Bitcoin futures earlier in the article. Bitcoin futures are a great way to trade Bitcoin without needing to actually own the asset. The downside is certainly steep with Bitcoin futures as you are trading future price action with leverage on margin.

Bitcoin ETFs

There are several Bitcoin ETFs on the markets now including several that specifically hold Bitcoin futures contracts from companies like ProShares, Valkyrie, VanEck, and Teucrium. Compared to the ETF industry's standard, most Bitcoin ETFs have a higher MER (Management Expense Ratio) which is how much of your total investment the companies take. In these cases, it might be cheaper in the long run to buy Bitcoin itself.

Owning Bitcoin

How strong are your diamond hands? Buying and holding actual Bitcoin can be a bit of a process for those who are not experienced in crypto investing. You need to start a brokerage account, abide by the KYC (Know Your Customer) regulations, add fiat or other cryptos to your account, and then trade them for Bitcoin.

One issue with owning actual Bitcoin is that it is not completely safe unless you hold it in cold storage. This means in a hard wallet that is not connected to the internet where it might be the target of malicious hackers.

If you truly believe in the long-term viability of Bitcoin, it is likely just cheaper to buy and hold Bitcoin in a cold storage wallet. Over time you will save on the MER fees for Bitcoin futures ETFs. You might find it less stressful than constantly trading Bitcoin futures as well -- assuming Bitcoin continues to rise.

Where to trade bitcoin futures

It used to be that you could only trade Bitcoin futures at the CME or the Chicago Board Options Exchange or CBOE. Bitcoin futures trading actually started at the CBOE back in 2017.

Today, you can trade Bitcoin futures at nearly every centralized crypto exchange as well as, but not limited to, Binance, FTX, eToro, BitMEX, TD Ameritrade, Kraken, and Interactive Brokers.

Which cryptos have futures?

The CME and CBOE only allow futures trading for Bitcoin and Ethereum. Since these are the two most stable cryptos, aside from stable coins themselves, it makes sense that these two regulated exchanges would only offer the two benchmark cryptos.

With the introduction of perpetual futures contracts on crypto exchanges, it has opened the door for traders to be able to trade futures on other types of crypto as well. Perpetual futures contracts are just as they sound: futures contracts with no expiration date. You can trade perpetual futures on most cryptos now including Bitcoin, Ethereum, Solana, DogeCoin, Cardano, and Polkadot.

Will bitcoin futures affect the price of bitcoin?

This depends on who you ask. As a general rule of thumb, most derivative instruments do not actually have an impact on the price of the underlying asset. However, there are times when the options market can produce underlying demand in the equities markets as we have seen with the AMC and GME short squeezes.

The only time we might experience some volatility or at least abnormal trading volume is the expiration date for Bitcoin futures contracts. On the last Friday of every month, Bitcoin futures come to an end. One thing to note is that since Bitcoin futures contracts are primarily cash-settled, they do not have an effect on the overall supply or demand of Bitcoin.

What is bitcoin futures arbitrage?

To start, let’s review what arbitrage is. Arbitrage is the simultaneous buying and selling of the same asset on multiple exchanges to take advantage of a difference in price. It is a popular strategy in most markets like equities, cryptos, and sports betting.

So how do you arbitrage Bitcoin futures? It’s a slightly different strategy than buying Bitcoin futures and selling them on another exchange. To arbitrage Bitcoin futures, you first need to open accounts at two different exchanges that offer Bitcoin futures trading.

The simplest way to do this is to buy a long position in Bitcoin in one account and then short sell a Bitcoin futures contract in the other. Since the futures contract expires at the spot price of Bitcoin, if the futures contract value is higher than the current price, arbitrageurs can capture the difference in a single trade.

Crypto arbitrage is a fairly advanced style of trading, but when executed correctly it can provide a nice, steady cash flow. Some calculate that this strategy provides about a 25% annualized return with as minimal of a downside as you might see when trading crypto derivatives.

Bitcoin Futures simulator

As with trading simulators for the equities market, Bitcoin futures also have simulators to help you get accustomed to the way these contracts and the markets behave. Bitcoin and cryptos can be volatile and unpredictable, so before you step into futures trading with your own money, you can hone your skills in a paper trading account.

One such Bitcoin futures simulator is TradingSim. While TradingSim got its start as an equities simulator, it has also added Bitcoin futures trading to its platform. TradingSim provides a ton of features like full stock and crypto charts, historical data, and technical indicators for less than $25 per month. You can also analyze your trades with its built-in analytics tool.

TradingSim BTC Bitcoin futures simulator

If you have ever used a paper trading account, you'll know how useful it can be to practice your trading strategy. Trading simulators can provide valuable experience when trading Bitcoin futures, and allow you to make trading mistakes without losing any of your hard-earned money.

Bitcoin futures summary

Bitcoin futures contracts trade just like any other commodity or asset. Traders can buy or sell them at the CME or CBOE, as well as other centralized crypto exchanges like Binance, Kraken, or FTX.

Bitcoin futures are a calculated bet on the future price direction of the underlying asset. Since you are investing in the price action of Bitcoin and not the token itself, it is often an easier process than signing up for a crypto trading account and moving your Bitcoin into cold storage.

There are even instruments called perpetual futures contracts now. These are the same as Bitcoin futures contracts except for the fact that they do not come with an expiration date. These can be traded with Bitcoin or other major crypto assets like Ethereum and Solana.

While the potential gains from trading Bitcoin futures contracts on leverage can be enticing, the volatility and unpredictability of Bitcoin can also bring stiff losses. Be sure to test your strategies in the simulator here at TradingSim before putting your hard-earned money at risk.


Tags: Futures, Crypto


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