In simple words, Bitcoin or crypto futures are assets that help you earn profits without holding a particular asset. It works just like stock and commodity futures. You’ve to predict or speculate on the future position of the Bitcoin market. If you’re correct in your analysis, you win profits. Otherwise, you lose your investment.
In a future contract or futures trading, you agree to purchase or sell a crypto asset for a particular price later. This is a technique used by traders to earn profits in the ever-fluctuating crypto market without actually owning the asset. After earning profits, they can square-off their position and keep the profits.
The CME or Chicago Mercantile Exchange has monthly contracts to provide cash settlement to investors. So, investors can choose to take cash instead of Bitcoin or any other asset upon contract settlement.
Another financial regulator, the Chicago Board Options Exchange, started offering Bitcoin contracts way back in December 2017 but discontinued them in March 2019. In addition to stock futures and commodity futures, it’s currently also offering Bitcoin and crypto future contracts.
Crypto exchanges like Intercontinental exchange and digital wallet giant Bakkt have also been offering monthly and daily crypto future contracts.
Features of Bitcoin Futures
There are myriad advantages of Bitcoin future trading than trading the actual crypto asset. For starters, the crypto futures contracts are offered and traded on an authentic crypto exchange platform. Such platforms fall under the supervision of the Commodity Futures Trading Commission. It allows big institutional investors confidence to invest and participate in future trading.
Also, as cash is used for contract settlements, there’s no need for a Bitcoin wallet. So, no exchange of Bitcoin is carried out using a digital wallet.
Features offered by CME on Bitcoin futures include-
- Method for Price Quotation: US dollars
- Unit of Contracts: 5 Bitcoins as recommended by CME Bitcoin reference rate
- Code of Trading: BTC
- Method of Settlement: Cash Settlement
- Time for Trading: Start- 6 pm Sunday, End: Friday 5 pm
- Contracts Listed on Exchange: Listed for 6 successive months and two Decembers
Bitcoin and Crypto Exchanges
Most crypto and Bitcoin investors have only one concern regarding the progenitor of digital currencies- its volatility. The confidence of potential investors gets further slumped by the failure of crypto exchange platforms such as Mt. Gox. For some investors, Bitcoin’s price volatility holds them back, while for others, it presents a wonderful opportunity. An opportunity for trading and earning profits.
Speculators and traders leverage the Bitcoin market volatility by purchasing and selling the asset on crypto exchanges like Kraken and Coinbase. A crypto exchange works just like an Internet-based securities trading platform where users deposit Bitcoin or any fiat currency to execute trade orders.
Some exchanges, mostly small-scale ones, allow you to stack up crypto assets. Large-scale crypto exchanges, on the other hand, also provide the feature of trading these crypto assets. So, if you want to trade Bitcoin futures, look for cryptocurrency exchanges that provide you the feature.
How to Buy and Sell Bitcoins?
Trading on the stock market is much more than only buy and sell. This involves matching the sell and buy orders. Similarly, in the case of Bitcoins, the buy and sell orders of all the traders are matched. When you place the order, it is entered in the order book and it remains there till the right price is matched and the exchange transaction is completed.
How complicated it may sound, actually, the whole process is simple and secure. Initially, the investors have to deposit funds in some currencies like euros or U.S. dollars, etc, that are supported by the particular exchange. Making the deposit is very easy as most exchanges allow deposits through credit cards, bank wire transfer, or directly by linking a bank account.
For the convenience of investors, the exchanges also offer margin trading. This is like taking a loan from your broker so that you can trade in a larger number of Bitcoins than what your funds actually allow. Traders usually use this facility of trading on margin to take a short or long position for more stocks and earn more profits. The brokers usually ask their clients to maintain a minimum maintenance margin in their trading account so that the losses, if any, can be covered.
When the trader’s account is short of this maintenance margin, the trader gets a margin call from the broker. In such a situation, the broker may close some of the open positions to account for its minimum balance requirement if the trader does not deposit additional amounts to reach the maintenance margin.
Special Considerations for Bitcoin
Similar to stock exchanges, a cryptocurrency exchange also collects a fee for the execution of trades. But, in the case of storage of the Bitcoins and other cryptos, the exchanges are a less secure option. These exchanges are prone to cyber fraud and theft of the stored cryptos. So, intelligent and cautious investors chose hardware wallets or cold wallets for storage of their digital currencies.
With the growing popularity of Bitcoin trading, the prominent cryptocurrency exchanges offer the option of Bitcoin futures. This opens up the very profitable future trading in cryptos for all traders, investors, and speculators. The centralized exchanges allow trade based on the trader’s risk profile, gain exposure to crypto prices, or hedge enables Bitcoin positions. The introduction of futures trading in Bitcoins by the global marketplaces has ensured price transparency, regulated Bitcoin trading, and enabled risk management in cryptocurrency future trading. This has stabilized the position of Bitcoin as an asset class in the trading arena.