Technical Trading

Bitcoin Futures: What They Are and How They Work

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If you want to speculate on how an asset’s price will change, you can do so with futures contracts (also simply called “futures”). Futures contracts are usually associated with commodities or stock indices. But you can also trade Bitcoin Futures — a digital commodity.

How Futures Work

Before we discuss bitcoin futures specifically, let’s take a look at futures in general.

A futures contract is an agreement that allows you to buy or sell an asset at a specified price at a specified future date. When the contract date comes, you settle the contract.

(Bear in mind that in practice, futures are more complicated than this. For example, many traders roll futures over to the next month.)

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Buying vs. Selling

Whether you buy or sell a futures contract would depend on whether you expect the price to go up or down during the time you’ll be holding the contract.

  • If you think that the price of the underlying asset will go up during this time, you would buy the contract.
  • If you think that the price of the asset will go down, you would sell the contract.

The seller is essentially betting that the asset price will go down, while the buyer is betting that the price will go up.

Bitcoin Futures

Bit LogoBitcoin was the first cryptocurrency, and it remains the most well-known and most valuable of the digital currencies in existence today.

Like most digital currencies, Bitcoin is volatile. Futures are one way that you can speculate on Bitcoin’s price movements. You might choose futures over speculating on the coin itself for several reasons:

  • You’re skeptical about bitcoin’s risks and trading on a government-regulated exchange offers you security.
  • You can hedge against spot positions.
  • You do not have access to or do not want to own a digital wallet. (Wallets are required to hold bitcoin.)

How to Trade Bitcoin Futures

Trade BtcUnregulated bitcoin futures have been traded on crypto exchanges since 2017, and you can still trade in this manner. However, you can also trade on a regulated exchange, which offers many benefits.

There are two main exchanges in the U.S. offering bitcoin futures:

  • The Chicago Mercantile Exchange (CME), where it trades as BTCM20
  • The Intercontinental Exchange (ICE), which offers both monthly and daily bitcoin futures contracts under the registered trademark Bakkt.

Both the CME and the ICE are regulated by the Commodity Futures Trading Commission (CFTC), and the contracts are cash-settled.

This makes CME and ICE attractive to institutional investors who want to trade bitcoin. However, trading futures on CME and ICE requires a significant upfront investment.

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Low-Cost Trading Alternatives

Those who want to speculate on bitcoin’s price (or other cryptocurrencies) via low-cost contracts can do so via government-regulated brokers like eToro, Kraken, or Plus500.

  • eToro offers it’s famous “copy trading” feature, which allows you to copy the trades of savvy traders on their platform.
  • For those who want to hold crypto for the long term, eToro offers “portfolios” which include a pre-set mix of cryptocurrencies. You can view the past performance of the portfolio before choosing to invest.
  • You can start a trade for as little as $35 .
  • Kraken offers low-cost futures contracts at retail prices. They require a 2% collateral and provide up to 50% leverage.
  • Interestingly, Kraken also offers futures for Ethereum, Bitcoin Cash, Litecoin, and Ripple.

We know of no broker that doesn’t offer a free demo account. These are a great way to try out trading without committing any funds.

Regulated brokers are also a source of quality information on learning how to trade. Many, like Kraken, support traders at any experience level. Their online training materials include podcasts and videos.

The three brokers mentioned above also have intuitive platforms that help you get up and running fast.

Summary

Futures contracts used to be available only for assets like commodities and indices, but they are now available for bitcoin as well.

Larger investors will find such contracts on major exchanges, while smaller investors can become involved via regulated brokers.

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