All across the cryptocurrency market there is innovation abound, both in terms of the projects and digit assets themselves, but also amongst trading platforms and cryptocurrency exchanges. These platforms offer a variety of assets, trading products, and financial instruments to choose from. Bitcoin futures are just one of many different derivatives products available to cryptocurrency traders today that can be used to speculate on Bitcoin price action and potentially earn a substantial profit.
Bitcoin futures aren’t for your average investor, and their existence can even have a lasting negative impact on spot markets and long-term pricing, so not all is glorious related to Bitcoin futures.
This in-depth Bitcoin futures guide will provide education regarding how Bitcoin futures work and explain what are Bitcoin futures and how to use them to your advantage financially to make money.
Futures are a popular way to trade, speculate, and hedge spot positions in the financial sector. By definition, they are a standardized contract or agreement to buy or sell something at a predetermined price as a specified time in the future. Interestingly, the Dutch pioneered futures contracts in the 17th century, and it was futures that were behind what drove “Tulip mania” that is often associated with Bitcoin and cryptocurrencies. Tulip mania, was the first ever recorded financial bubble, another term Bitcoin is often associated with.
According to Wikipedia, the 1972 creation of the International Monetary Market by the Chicago Mercantile Exchange known today more commonly as CME Group was the world’s first financial futures exchange, and launched forex currency futures. Later, in 1976, the IMM added interest rate futures on US treasury bills, and in 1982 stock market index futures were added for the first time.
From stock trading forward, several more futures trading products have been introduced, including Bitcoin in 2017, and Ethereum in 2021. More cryptocurrency products are likely to develop as the industry grows acceptance and popularity.
Bitcoin futures are a version of futures derivatives contracts that involve speculating on the valuation of Bitcoin – the leading digital currency by market capitalization. CME Group and the Chicago Board Options Exchange were the two primary companies and exchanges to introduce Bitcoin futures in 2017 at the end of the bull market and peak Bitcoin fever back then.
Before their existence, there were very few ways for traders to short Bitcoin, and their introduction correlated with the start of the 2018 Bitcoin bear market, where the average price action for months at a time was bearish.
The current market trend in the virtual currency space is bullish again starting in the third quarter of 2020, thanks to renewed interest in the asset class, that has also caused a resurgence of interest in Bitcoin futures trading. Bitcoin futures open interest has broken all records along with a new all time high in price.
Bitcoin futures are an agreement to buy or sell Bitcoin (BTC) at a predetermined price as a specified time in the future, between two traders that don’t know one another. The trade is made by a broker through a derivatives contract tied to the current market price of BTCUSD. The contract must be settled by the time the contract expires on a date set in the future.
Bitcoin futures can have an impact on Bitcoin price in a variety of interesting ways. For example, large scale investors or traders called whales, can attempt to use their capital to influence spot markets temporarily to settle Bitcoin futures contracts in their favor, which is often why price volatility increases around futures or options expiry dates. Bitcoin futures price contracts are settled based on an index from other cryptocurrency exchanges.
But there can also be unforeseen correlations. For example, when the leading cryptocurrency by market cap, Bitcoin, was introduced on CME Group, interest surged initially, but immediately began to decrease, which studies show matches the past performance of other markets when futures were first introduced.
This has given the introduction of futures a bearish tone, because it allows traders to hedge spot positions and short Bitcoin. But Bitcoin futures aren’t always bearish, and there are long positions in addition to shorts.
Bitcoin futures speculates on the future market value of Bitcoin, but when it is time to settle the contract at expiry, it is done at the current price per BTC. This doesn’t necessarily translate to an increase in Bitcoin price, like increased activity in buying on a spot exchange.
Some Bitcoin futures are settled in cash, which has no impact on the limited BTC supply. If the Bitcoin futures contract is settled in BTC, however, it can cause the price of BTC to go up when contracts are settled back into BTC, especially when it is shorts covering, or an abundance of long orders.
Because Bitcoin futures are different from traditional spot market crypto trading, there are several key pieces of information to pay close attention to when opening or closing any positions. Failing to pay attention to these critical areas could lead to total capital loss.
There are also several PnL calculators that exist on the web that traders can access for free or at a monthly cost. However, only you are responsible for your own calculations and position management.
Bitcoin futures are only one type of cryptocurrency derivatives contract that involves BTC trading. In addition to Bitcoin futures, there are also Bitcoin options and Bitcoin CFDs that are slightly different, while maintaining the benefits futures bring to traders.
CFDs stand for contract for difference, and offer greater flexibility over Bitcoin futures, but many of the same benefits. CFDs, like futures, don’t have to be Bitcoin, but for the subject matter is what we’re focused on. For example, PrimeXBT offers Bitcoin-based CFDs where accounts are settled into BTC, but Bitcoin and other cryptocurrencies, even stock indices, forex, commodities, and more can be traded as CFDs.
Here’s how Bitcoin futures and CFD trading compares and differs.
This table outlines the key differences and similarities between Bitcoin futures and Bitcoin CFDs.
|What It Is||The option to buy or sell
a contract at any time
|The obligation to buy or sell
a contract by expiry
|Way to hedge the market||Yes||Yes|
|Easy to access||Yes||No|
|Up front premium fees||No||No|
Bitcoin futures and CFDs are serious trading products and should be fully understood before trading. Therefore, we have crafted this FAQ to help answer some of the most commonly asked questions about Bitcoin futures and CFDs.
Bitcoin futures are a type of crypto derivatives contract that allows investors to hedge against positions and traders to profit from speculating on Bitcoin prices in the future.
Bitcoin derivatives refers to any type of financial instrument that is tied to the price of an underlying cryptocurrency asset such as Bitcoin.
CFD stands for contract for difference, and is a similar type of derivatives contract to Bitcoin futures, with added flexibility. CFDs aren’t tied to an expiry date, which lets traders get in and out of position quickly and efficiently.
The primary difference between Bitcoin CFDs and Bitcoin futures, is the term tied to each contract. Futures include an expiry date, while CFDs let traders open or close positions at any time.
With the right skills, tools, and patience, there is a lot of money to be made in Bitcoin futures or in CFD trading. Like any investment or trading, there is also risk involved so risk management must be a central focus.
Both types of contracts are safe from any harm, but there is risk associated with these types of contracts that are exposed to the underlying asset’s market volatility.
CFDs and futures are very similar, however, CFDs are better due to the flexibility they provide.
Bitcoin futures can be traded on the Chicago Merchantile Exchange otherwise known as CME Group, or Bitcoin CFDs are available at PrimeXBT. Both platforms are highly reputable.
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