Bitcoin Futures Trading – in-depth guide
What are futures?
A futures contract is an agreement between a buyer and a seller about the purchase/sale of an asset in the future. The parties specify in advance how long and at what price the transaction will take place. Futures are approved on the basis of standard conditions that are formed by the exchange itself, where they are traded.
This definition implies two properties of the futures:
- It has an underlying asset, and it is its derivative. The underlying asset for the futures can be anything: a stock, a commodity, a currency pair, an exchange index, crypto.
- It has an expiration date.
For each underlying asset, all conditions (delivery time, place, method, etc.) are established separately, which helps to quickly sell assets at a price close to the market.
What are crypto futures?
Like a typical futures contract for a commodity or stock index, crypto futures have similar characteristics.
Crypto futures obliges the seller to transfer to the buyer bitcoin at the price specified in the contract at a strictly defined time. For example, in July, you bought a September delivery futures contract for 1 BTC at a price of $ 8,000. Regardless of whether the price of bitcoin drops or rises, in September the seller transfers 1 BTC to you.
Perpetual futures works according to a similar scheme with the only difference being that they will never expiry. Instead of delivering the actual asset (BTC) the reevaluation of the future contract occur based on the market price and the certain funding is either paid of taken from the holder of the futures contract. For example, in July you bought the September futures for 1 BTC at a price of $ 8,000. If bitcoin increased in price by $ 500, you will get $ 8,500 back in September. If bitcoin fell in price by $ 500, then in September you will receive $ 7,500.
Where to trade crypto futures?
There are several options for trading cryptocurrency futures that depend on what you need. If we talk about institutional services, their nature is limited, but they are regulated and much more comfortable for traditional traders. Today, institutional futures trading is available only in the case of bitcoin, but over time other assets may join it. Key providers of such services are CME Group and Bakkt. For some time, Cboe also offered to trade bitcoin futures, but then stopped this service. In general, there are certain limits for this type of account, as well as the minimum amount of funds that you must have even to open an account, so this option is not suitable for beginners and low-income traders.
Fortunately, there are other large cryptocurrency exchanges offering this service. Platforms such as FTX, BitMEX, Binance Futures, Kraken, which provide futures trading services to traders with more modest incomes. However, opening an account will require a lot of red tape, as these exchanges use the “know your customer” policy.
The benefits of trading cryptocurrency futures directly through exchange include the fact that they offer more than just bitcoin contracts. All of the above sites offer a variety of products, including other large coins, including Ethereum, Litecoin, Bitcoin Cash, XRP and others. This gives users more flexibility and allows them to implement more complex strategies. Another important advantage that has already been mentioned is that you can start trading with much lower starting capital than in the case of institutional services.
What are the benefits of crypto futures?
You may have a reasonable question: why bother with some obscure futures if you can speculate in the same way on the spot market. But compared with spot trading, futures have their own advantages.
There are no restrictions on short selling. Short selling is an opportunity to sell what you don’t have. With stocks, it works like this: you borrow certain shares from a broker to sell them and make a profit. You will then have to return the same shares to the broker. If you borrowed shares from a broker, sold them, and then they fell in price, you are in a plus: to return shares to a broker, you will buy them at a lower price. For such a “borrowing” of shares, brokers also take a percentage. It is different from futures: they do not exist in the material world - they are just agreements. Therefore, buying or selling futures simply shows your position; no one needs to borrow securities.
Another advantage of futures is leverage. Leverage is when the exchange allows you to contribute part of the capital for the investment by providing the remaining funds. Say you want to make a $ 100 Bitcoin deal, but you only have $ 10. If the exchange offers you leverage, then, accordingly, it brings in the amount that is missing before the transaction. With a price increase, your profit will grow 10 times, but the risks here are much higher. If the market goes in the wrong direction you have set, you can lose your capital (in this case $ 10) much faster than if you bought bitcoin directly for the same amount. Let's consider an example in more details: so, if the buyer invests $ 1,000 and expects to sell the purchased cryptocurrency for 1,500. In this case, his profit will be 50%. But if he gets a loan of $ 10,000 at 10% and invests 11,000 in speculation, then under the same hypothetical conditions, he will gain $ 16,500. Having given $ 1,000 of interest, the speculator will have a net revenue of $ 15,500, and a profit of $ 14,500, which means a profit rate of 1450%! So, in case of unsuccessful trading, you may encounter a temporary decrease in the value of your asset or even lose all funds in the account. In other words, traders using leverage can easily “drop out” of the market even with relatively modest movements in quotes. This is very important since usually, exchanges allow a significantly higher level of leverage for futures contracts than for direct trading on the market, which makes this asset attractive to high-risk traders.
Main crypto futures trading strategies
The two main futures strategies are hedging and speculation.
A hedging strategy is used to protect against potential adverse changes in the price of the underlying asset. If you have stocks of company x in your portfolio and you expect it to fall, but do not want to get rid of securities, sell short futures for stocks. Then the profit from the futures compensates for losses from the drawdown of shares.
Also, hedging is used by producers of the underlying asset, for example, for example, miners who want to save their funds.
The speculative component is the essence of the concept of the existence of futures contracts. Futures protect traders from volatility and unexpected news affecting the market. Often, such contracts are used in large industries in order to provide a certain degree of confidence in asset prices in the coming months. At the same time, the contracts themselves can also be bought and sold, and this is already a space for speculators. Futures become more or less valuable depending on the changes that have occurred in the market since the conclusion of the contract and the time remaining until its expiration.
In fact, the same can be said about cryptocurrency futures contracts. If you think that bitcoin will grow, you can, of course, buy and hold it, and sell it later if your forecast is correct. But futures contracts allow investors to earn on the movements of the Bitcoin exchange rate, without being its holder directly. This trading option has several advantages. Firstly, trading in cryptocurrencies is either insufficiently regulated or not regulated at all in many markets, while futures trading in this regard is much “cleaner” and more transparent. Investors simply do not have to fear any changes in the regulation of futures trading in the next five years, which cannot be said about digital currencies. Secondly, thanks to futures, investors can earn on bitcoins in regions where cryptocurrencies themselves are prohibited because they buy and sell not bitcoin itself, but a contract. In other words, with the help of this tool, you can earn money and at the same time not facing the risks associated with trading directly with digital coins.
Word of caution before trading crypto futures.
Let's move on to the negative sides of futures, which you should definitely be aware of when you first enter this market:
Futures are not suitable for investments and long-term transactions. As a result, futures are of interest only to active speculators, conducting many short-term transactions in order to maximize profits;
You need a large supply of funds on deposit. Although the specifics of acquiring futures (large leverage, a contribution of a guarantee obligation) encourages the acquisition of the maximum possible number of contracts, do not forget about daily debiting or charging of margins. If one of the assets gives a significant and prolonged drawdown, you risk liquidating the account and losing access to other transactions, and the contracts will be forcibly closed by the exchange
It is necessary to clearly predict the level of risk, the volume of transactions, etc., before starting with futures trading.
To minimize possible losses, newcomers to the futures market are advised to use only long positions (playing at rising rates) and spreads. A downgrade game requires quick decision-making and instant reaction to market events, so it is better to leave it to more experienced traders.
In any case, the futures market requires the active work of the trader, his involvement in trading. Only in this case, you can get a decent income from your work.
Learn more about crypto trading automation.