How to Trade Bitcoin Futures Contracts: Bitcoin futures enable investors to gain exposure to Bitcoin (BTCUSD) without having to hold the underlying cryptocurrency. They are similar to a futures contract for a commodity or stock index in that they allow investors to speculate on the cryptocurrency’s future price. The Chicago Mercantile Exchange (CME) offers monthly contracts for cash settlement. This means that an investor takes cash instead of physical delivery of bitcoin upon settlement of the contract.
The Cboe Options Exchange offered the first bitcoin futures contract on Dec. 10, 2017. But it discontinued offering new contracts in March 2019. The CME opened its bitcoin futures platform on Dec. 18, 2017. In addition to standard bitcoin contracts, the exchange offers Micro Bitcoin futures, which are 1/10th the size of a standard bitcoin, and options on bitcoin futures. Other venues, like Bakkt and Intercontinental Exchange, offer daily and monthly bitcoin futures contracts for physical delivery.
What is Bitcoin Futures?
Bitcoin futures contracts are a derivative product similar to traditional futures contracts. Two parties agree to buy or sell fixed amounts of bitcoin for a specific price on a certain date. Traders use them speculatively, but you can also use them to hedge. Hedging is especially popular with miners who need to cover their operating costs.
Futures are a great way to diversify your portfolio, trade on leverage, and bring some stability to your future income. If you want to explore more advanced strategies with futures, take a look at arbitrage. Cash-and-carry arbitrage and inter-exchange arbitrage offer some lower-risk trading opportunities when executed correctly.
Bitcoin futures contracts are an alternative investment opportunity to simply hold coins and tokens. As a more complex product, they require a deeper understanding to trade safely and responsibly. Although they are more challenging to use, futures provide ways to lock in prices with hedging and profit from downturns in the market with shorting.
Bitcoin futures are monetary derivatives much like traditional futures contracts. to place it honestly, you could agree to shop for or promote a fixed quantity of BTC for a specific fee (the ahead rate) on a certain date. if you cross long (conform to buy) on a Bitcoin futures contract and the mark rate is above the ahead rate at the expiration date, you will earnings. The mark charge is an anticipated fair price of an asset derived from its spot fee and other variables. We’ll cowl this in extra detail later inside the article.
If the mark price is below the forward price at expiration, you will lose money and the short position profits. A short position occurs when a trader sells an asset they’ve borrowed or own while expecting the price to drop. The trader then purchases the asset at a later date to make a profit. You can settle contracts physically by exchanging the underlying asset or, more popularly, via cash settlements.
Why do people use Bitcoin futures?
One principal use case for Bitcoin futures is the possibility for customers and sellers to lock in future prices. This technique is called hedging. Futures historically have been used as hedging instruments within the commodities markets in which manufacturers need stable profits to cowl their expenses.
Traders also use futures for speculation. Long and short positions allow you to bet on the state of the market. In a bear market, it’s possible to still make money by taking a short position. There are also multiple possibilities for arbitrage as well as sophisticated trading strategies.
Benefits of trading Bitcoin futures
However, on this page, we are going to show you the best and most important benefits of trading bitcoin futures. We are going to list and explain them to you for easy understanding.
Here is the 6 benefit of trading bitcoin futures:
While hedging may also seem to be greater useful in bodily commodity markets, it does have a use in crypto too. Bitcoin miners have jogging costs just like farmers, and they depend upon fetching a truthful fee for his or her merchandise. The hedging procedure includes the use of both the futures marketplace and the notice market. let’s see the way it works.
2. The futures contract
A bitcoin miner can take a short position in a futures contract to protect their BTC holdings. When the futures contract matures, the miner will have to settle with the other party in the agreement.
If the price of Bitcoin in the futures market (mark price) is higher than the contract’s forward price, the miner will have to pay the difference to the other party. If the mark price is lower than the contract’s forward price, the other party taking a long position will pay the difference to the miner.
3. The spot market
On the day of the futures contract’s maturation, the miner sells their BTC on the spot market. This sale will give them the market price, which should be close to the mark price in the futures market.
However, the spot market trade will effectively cancel any profits or losses made in the futures market. The two sums together provide the miner with the hedged price they wanted. Let’s combine the two steps to illustrate with numbers.
4. Combining the futures contract and spot trade
A miner shorts a contract for one BTC at $35,000 in three months. If the mark price is $40,000 at the maturation date, they lose $5,000 in the settlement paid to the long position in the contract. At the same time, the miner sells one BTC on the spot market, where the spot price is also $40,000. The miner receives $40,000, which covers his $5,000 loss and leaves them with $35,000, the hedged price.
5. Leverage and margin
An attractive feature for buyers is buying and selling on margin. Margin helps you to borrow finances and enter larger positions than you would commonly find the money for. larger positions result in large earnings as small charge movements are magnified. on the drawback, your preliminary capital can be swiftly liquidated if the market actions against your positions.
An exchange displays leverage as a multiplier or percentage. For example, 10x multiplies your capital by 10. So, $5,000 leveraged 10x provides you $50,000 to trade. When you trade using leverage, your initial capital covers your losses and is known as your margin. Let’s look at an example:
You purchase two quarterly Bitcoin futures contracts at $30,000 each. Your exchange has let you trade this with 20x leverage, meaning you provide only $3,000. This $3,000 acts as your margin, and the exchange will take your losses from this. If you lose more than $3,000, your position will be liquidated. You can calculate the margin percentage by dividing 100 by the leverage multiple. 10% is 10X, 5% is 20X, 1% is 100X. This percentage tells you how much the price can fall from your contract’s price before liquidation.
6. Portfolio Diversification
With Bitcoin futures, you can further diversify your portfolio and employ new trading strategies. It’s recommended that you create a well-balanced portfolio across different coins and products. Futures are compelling for the various trading strategies they offer you instead of just HODLing. There are also lower-risk arbitrage strategies with smaller profit margins that can reduce your portfolio’s overall risk. We’ll discuss these strategies further a bit later on.
Bitcoin futures on Binance
Not every futures contract is the same. Different exchanges have varying mechanisms, expirations, pricing, and fees on their futures products. Binance currently offers a few options that differ mainly in their expiration date and funding.
1. Expiration date
So far, we’ve only mentioned futures that have a defined expiration date. Binance’s futures exchange has quarterly futures, but you can find monthly and semi-annual maturities (expiration dates) on other exchanges. You can quickly check when a contract will expire from its name.
Bitcoin futures quarterly contracts on the Binance exchange have the following calendar cycle: March, June, September, and December. A BTCUSD Quarterly 0925 contract expires on 25 September 2022, 08:00:00 UTC.
Another popular option is to trade perpetual futures without an expiration date. Losses and profits are treated differently in comparison to quarterly futures and involve a funding fee.
2. Funding fee
Whilst you enter a Bitcoin quarterly destiny on Binance, you need to hold your margin to cowl any possible losses. but, you will only pay this loss while you are liquidated, or the contract matures. With a perpetual futures contract, you furthermore may want to pay or get hold of a investment rate each 8 hours.
Investment fees are peer-to-peer payments between investors. those charges save you divergence inside the forward rate of perpetual Bitcoin futures contracts and the mark charge. The mark fee is much like the spot charge of BTC but it’s designed to save you unfair liquidations that may arise whilst the marketplace is exceptionally risky.
For example, a one-off exchange within the spot marketplace should temporarily improve the fee by thousands of greenbacks. This volatility could liquidate futures positions however isn’t truly consultant of the real marketplace fee. you can see the investment fee highlighted under in pink and the time it’s due.
A effective funding charge way the perpetual contract’s rate is higher than the mark fee. while the futures marketplace is bullish and the investment rate is high quality, buyers in lengthy positions pay the investment charge to quick positions. A bad investment charge method that perpetual contracts’ expenses are lower than the mark price. In this example, brief positions pay the charge to lengthy positions.
5 ways to start trading Bitcoin futures contracts?
If you want to start trading Bitcoin futures on Binance, all you need is to set up an account and get yourself some funds. Here’s a step-by-step guide on getting your first Bitcoin futures contract:
- Create an account with Binance and enable 2FA (two-factor authentication). If you already have an account, make sure 2FA is on so you can deposit funds into your futures account.
- Get your hands on some BUSD, Tether (USDT), or other supported cryptocurrencies for futures trading. The easiest way to do this is to purchase them with your debit or credit card.
- Navigate to the Bitcoin futures overview and select the type of contract you want to purchase. Choose between COIN-M Futures or USDⓈ-M Futures and if they are perpetual or will mature.
- Choose the amount of leverage you are comfortable using. You can do this to the right of the button on the trading UI. Remember, the higher the leverage, the more likely you are to be liquidated with small price movements.
- Select the amount and type of order you want to use, then click [Buy/Long] or [Sell/Short] to open your Bitcoin futures position.
Bitcoin futures trading takes a tried and tested derivative from traditional finance and brings it to the crypto world. Crypto futures markets are now extremely popular and can easily find trading platforms with high trading volume and liquidity. Still, trading on Bitcoin futures markets involves high financial risk, so make sure you understand the working mechanisms of futures trading before getting started.
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