Bitcoin futures trading lets you go long on Bitcoin if you want to bet on a price rise, or go short on Bitcoin if you want to bet on a price drop.
When you buy Bitcoin futures, what you're actually purchasing is an agreement to receive a certain amount of Bitcoin, or the equivalent amount of money, at a specified time.
With this mechanism, you can profit from correctly betting that the price of Bitcoin will go up, which is called going long, or profit from correctly guessing that the price will go down, which is called going short. It's generally regarded as a risky way of trading, more suited to advanced traders than beginners.
Note that the following is a general guide only. Individual trading platforms may have variations on these systems.
In its simplest terms, Bitcoin futures works by having you deposit some money into a Bitcoin futures exchange and buying Bitcoin futures with it. Profits or losses will be realised when a futures contract is sold, or when it expires naturally.
You will typically be able to keep track of your "realised profits" or "realised losses" on an ongoing basis, which shows an approximation of how much you would gain or lose if you were to sell a contract at the current time.
Functionally, this is similar to watching your balance rise and fall as the market does.
The exact way your total realised profits and losses will balance out depends on how many contracts of which kinds you've purchased, the contract size and specifications, and what the market is doing.
Some of the factors which will affect how your realised profits and losses move are:
Contract size. The contract size is simply how large each contract is. For example, if you bought a thousand contracts, each of which was equivalent to $1, you'd have $1,000 in the market. Sometimes contracts are valued in BTC or another cryptocurrency, and sometimes they're valued in dollars or other fiat currencies.
Long or short? Short contracts mean your balance will rise as Bitcoin prices fall and fall as Bitcoin prices rise, while long contracts mean your balance will rise when Bitcoin prices do and fall when Bitcoin prices do. You can simultaneously have multiple contracts of different types which can offset each other.
Leverage. Functionally, this magnifies how much your balance rises or falls when the markets move. If you're using 100x leverage on a contract, your balance will rise or fall 100x faster than normal for the size of that contract. 100x is typically the highest leverage an exchange will offer and you can have different leverage on different accounts.
Expiration date. This is the date at which a contract is automatically closed and settled up. You can generally sell your contracts and pocket the gains or losses at any time, but when there's an expiry date, that's when the futures will close. They can sometimes be extended and many exchanges will also offer "perpetual contracts" which don't have any expiry date.
Perpetual contracts vs futures contracts
Perpetual contracts don't have a set expiry date, while other futures contracts do.
Bitcoin perpetual futures contracts, or "perpetual swaps," will typically track the spot price (the current market price) of Bitcoin.
Futures contracts with set expiry dates will often trade higher or lower than the current market prices, to account for the uncertainty of future Bitcoin prices.
What is futures trading used for?
Beyond speculation, futures trading can also be used as a risk management tool and a way of playing the market in more depth.
Futures contracts can be used to multiply profits, mitigate risks and profit from falling prices. They can also be a very quick way of losing money if you get liquidated, which can happen very quickly when using 100x leverage.
Bitcoin futures liquidation and collateral
When you're trading futures without leverage, the value of your futures contracts just rises and falls with the crypto markets as usual, according to your open contracts.
But when you're using leverage, the money used to buy a contract serves as collateral and you're essentially trading on borrowed money.
Just like leverage can help you quickly make more money on correct bets, it can also be a very fast way of losing all your funds on incorrect bets. If the markets go the wrong way, you can lose you entire deposit.
For example, if you're trading with 100x leverage, then a price change of just 1% could be enough to wipe out all your collateral and trigger liquidation.
Different exchanges will often have different liquidation thresholds. For example, some might close your orders once you've lost at least 80% of your collateral, and account for fees in different ways.
What are the fees for future trading?
A range of fees may apply, including:
Trading fees: There will typically be a commission fee for buying and selling futures contracts, similar to buying or selling cryptocurrency outright.
Extension fees: Fees may apply for extending a contract past its usual close date.
Overnight fees: Fees may apply when contracts open through certain time periods.
Interest payments: When you margin trade, you're borrowing money to leverage your trades. There will often be a cost for actually borrowing that money.
Deposit and withdrawal fees: You might have to pay fees for transferring money in or out of an exchange.
Where can I trade Bitcoin futures?
Some traditional trading platforms now offer Bitcoin futures, as do a number of dedicated cryptocurrency exchanges and forex trading platforms.
Traditional exchanges that now offer Bitcoin futures include CME and Cboe.
These are used to facilitate trading during specific hours, in well-regulated, legitimate and largely transparent environments.
Is Bitcoin futures trading safe and regulated?
Bitcoin futures trading is never safe. The markets are prone to manipulation and unpredictable price movements. You can do everything right and still lose money. Some exchanges are also safer than others, depending on how reliable, regulated and legitimate it is.
How well regulated an exchange is depends largely on where it's based. Some are largely unregulated, while others such as CME and Cboe are relatively tightly regulated.
Pros and cons of Bitcoin futures trading
Compared to simply buying and selling Bitcoin, futures trading has some benefits and drawbacks.
It lets you speculate on Bitcoin prices without owning Bitcoin
You can bet on price rises and falls
You are able to apply leverage to multiply risks and potential returns
Can be used to hedge against unexpected price moves
Cannot be used to buy Bitcoin, except where trades are settled in BTC rather than USD
More complicated and difficult than simply trading Bitcoin
High risk compared to simply buying Bitcoin
Bitcoin markets are unpredictable and prone to manipulation, which can lead to liquidation
Frequently asked questions
Perpetual swaps are a type of futures contract created specifically for cryptocurrency. As the name suggests, these contract types are indefinite without any set expiry date.
Depending on the contract, profits may be realised in either Bitcoin or the fiat currency equivalent.
It depends on the platform. Some will let you simply trade contracts which track Bitcoin prices with fiat currency deposits, while others will require you to deposit Bitcoin collateral.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
Andrew Munro is the cryptocurrency editor at Finder. He was initially writing about insurance, when he accidentally fell in love with digital currency and distributed ledger technology (aka “the blockchain”). Andrew has a Bachelor of Arts from the University of New South Wales, and has written guides about everything from industrial pigments to cosmetic surgery.
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