The Bitcoin trading sector is gradually evolving into a more complete ecosystem. Heralding back to the humble days of a single Bitcoin blockchain, crypto is now a sophisticated and mature financial industry. In contrast, Futures markets have been around for a long time, and on the traditional market, futures exist for current asset classes, including commodities and equities. In the case of Bitcoin, futures became a breakthrough for the crypto industry, indicating the young industry’s increasing legitimacy and maturity.
What Are Bitcoin Futures?
Bitcoin futures are a form of derivative contract with Bitcoin as the underlying asset. A “derivative” refers to a unique contract whose value is based on one of a variety of instruments in the financial markets, such as digital assets, stocks, bonds, commodities, or currencies. The word “derivative” simply means “being extracted from elsewhere.” In financial lingo, it means a contract whose value is derived from the performance of its underlying asset.
A successful digital asset derivative market means deep liquidity for Bitcoin and other altcoins contracts, as it means institutional-grade investors are comfortable with infusing capital, and the more these products are issued by private entities such as exchanges, the higher the chances of the product being regulated.
A Bitcoin futures contract is a standardized and binding legal agreement traded on exchanges where the buyer is obliged to either buy or sell Bitcoin (BTC) in the future at a predetermined price agreed upon in the present. Once the time period has expired, the buyer of a futures contract is required to buy the asset. On the flip side, the seller is required to sell the asset. Often, futures are traded in cryptocurrency exchanges in standardized forms to hedge against risks. Upon the expiration of a Bitcoin futures contract, the difference in price is usually settled in cash, whether BTC or fiat currency, such as EUR or USD.
A hypothetical example of a Bitcoin futures contract is as follows. Suppose the price of Bitcoin today is $10,000. However, you have reason to believe that Bitcoin prices will go down in three months. Therefore, you decide to short Bitcoin through a futures contract offered by a broker. When the three-month contract expires, you sell the futures contract at the stipulated price. If the price has indeed gone down, you pocket the difference as profit. This is obviously a simplified version of events because Bitcoin futures contracts can entail much more.
A Little Bit of History
Futures have actually been around since as far back as 1750 BCE, albeit in primitive forms. Hammurabi, an ancient Babylonian king, created a legal code that facilitated the sale of goods and services to be delivered at an agreed-upon price at a designated date in the future.
Later, agricultural stakeholders used futures agreements to safeguard against the volatility of agricultural prices. Agricultural products are subject to unexpected price shocks due to unpredictable weather events. In the modern stock market, however, futures serve as a legal instrument for speculators to create legally binding agreements and not for the delivery of a certain asset at a predetermined price.
Why Trade Bitcoin Futures
Trading Bitcoin on cryptocurrency exchanges is now booming business. After August 2017, for just over two years, Bitcoin went through a historic bull run. A devastating bear market in 2018 shook out many businesses, but then the pullback in 2019 is now instilling hope for investors and traders. Despite the swinging prices, futures traders could enter on either end of the return spectrum and earn profits depending on the positions they take.
Regulated Bitcoin futures first came onto the market on Dec 10, 2017, through the Chicago Board Options Exchange (CBOE). Later, the Chicago Mercantile Exchange (CME) also launched a Bitcoin futures contract. Notably, Bitcoin prices at this time were on a historic run toward $20,000, which is perhaps why these mainstream exchanges saw it fit to introduce BTC futures. Bitcoin took a significant step in its evolution into a mature asset class, and investors enjoyed greater liquidity, transparency, and efficient price discovery with futures in the market.
Trading Bitcoin futures offers the following advantages, among others:
- Speculators can enter the Bitcoin market without having to purchase and safely store Bitcoin, which has been a deterrent for many who don’t have a good grasp of how Bitcoin works. With Bitcoin futures, investors need only concern themselves with the market dynamics and Bitcoin prices.
- Bitcoin will get more exposure to investors, meaning the Bitcoin market will have more deep liquidity than the markets of altcoins.
- Bitcoin futures can reduce volatility and help stabilize Bitcoin prices in the long term.
- Mainstream and institutional investors can rely on publicly regulated exchanges if they don’t feel comfortable trading on mainstream cryptocurrency exchanges. Considering that the interest from investors interestingly coincides with the Q4 2017 bull run, regulated exchanges such as CBOE and CME brought many investors into the fold. Nonetheless, trading futures on crypto exchanges has since caught up, and so has the credibility of Bitcoin.
Bitcoin futures are now a prominent market commodity. The surge in investor interest in a more mature market is what drove mainstream exchanges like CME to offer Bitcoin futures. Terry Duffy, chair and CEO of the world’s largest derivative marketplace, explained the offering as follows:
“Given the increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a Bitcoin futures contract. As the world's largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery, and risk-transfer capabilities.”
Associated Bitcoin (BTC) Futures Volumes
May 2019 was a particularly good month for Bitcoin futures trading because CME, a gigantic derivatives marketplace, traded 13,600 contracts each day on average – that’s approximately $515 million in notional USD value, or 68K in BTC. At the moment, CME is the leading mainstream institutions in the Bitcoin futures market, recording new 2019 highs in June 2019.
Source: CME Group
Cryptocurrency exchanges can offer their own futures contracts. Given that the majority of crypto trading is via exchange platforms, crypto exchanges are fast-tracking efforts to build their own Bitcoin futures trading platforms. As a testament to the crypto market’s furthering maturity, some other coins have futures contracts as well.
The resurgence in Bitcoin prices this year also ramped up enthusiasm for some altcoin futures:
Bitcoin Cash Futures
Bitcoin Cash has also had an impressive year. UK trading platform Crypto Facilities reported close to $50 million in BCH contracts in August 2019. Cryptocurrency ramps like BitMex, Crypto Facilities, CoinFLEX, and Huobi also entered this market, offering related derivative products to investors. BCH is a Bitcoin fork, and the developments in its parent coin seem to trickle down to it. The futures offering allows more investors to enter into the BCH market, adding greater liquidity.
Ethereum is the second-largest cryptocurrency platform. Bitcoin may be the market darling, but Ethereum’s “smart contracts” feature will give it a competitive presence extending into the distant future. Even CME is looking at the prospects of becoming an Ethereum futures exchange, following the success of Bitcoin futures. What gives Ethereum a viable claim to decent growth in the market is its vibrant community, actual use cases, and proper institutional involvement in the project.
Already, a number of Ethereum futures trading platforms are in operation. However, the entrance of a regulated institution like CME or CBOE would be a remarkable milestone. It would mean high Ethereum futures volumes and therefore more liquidity for the leading altcoin. As mentioned earlier, ETH futures are an opportunity for investors to hedge and speculate on future prices without the risk of actually holding the asset.
Litecoin futures obviously don’t have the market presence of Bitcoin futures, but nonetheless, the announcement by UK crypto futures trading platform Crypto Facilities in June that it would begin offering a Litecoin (LTC) derivative product was significant.
This means that the platform will offer USD-denominated contracts with Litecoin as an underlying asset. This will give retail and institutional investors an easier way to hedge, arbitrage, or speculate on Litecoin price movements without the hustle of storage and management.
Litecoin is quite similar to Bitcoin structurally and has a block time that is four times faster while using the same proof-of-work consensus algorithm. Still, Litecoin is way below Bitcoin in terms of market capitalization, development, and hash rate. Nonetheless, the introduction of LTC futures does attract investors and expand liquidity.
In the grand scheme of things, crypto exchanges and trading platforms are increasingly aware of the potential of futures. As such, leading exchanges are investing in platforms for crypto futures products. Naturally, Bitcoin takes up a lot of space on account of its market dominance. This means that investors are most interested in Bitcoin performance, as it represents a large part of crypto.
However, as crypto continues to grow, the rest of the altcoin futures markets are looking to grow as well. Keep in mind that the cryptocurrency industry is only about 11 years old, and the fact that the markets are even this sophisticated is a remarkable feat.
Bitcoin futures still enjoy more liquidity than all other altcoins combined. This is obviously because of its market presence and capitalization as well as SEC agreeing that the asset is a utility. The CME trading availability gives Bitcoin futures a level of visibility that other coins simply can’t compete with.
Trading Bitcoin Futures
Given that Bitcoin is clearly the elephant in the room, let’s look at how to trade Bitcoin futures. Notably, the Chicago Board Options Exchange (CBOE) delisted the Bitcoin (USD) (“XBT”) futures contract in March 2019, which leaves the Chicago Mercantile Exchange (CME) as the major Bitcoin futures trading marketplace in the traditional market.
However, the world’s largest spot cryptocurrency exchange, Binance, recently acquired JEX, a futures trading platform in Seychelles, and rebranded it as Binance JEX, with plans to “further [build] the crypto asset derivatives market, providing Binance users with professional services, including futures contracts, options, and other derivative products.”
Here is a table listing different exchanges offering Bitcoin (and other digital asset) futures as well as those that plan to launch such products:
|Exchange Name||Bitcoin Product||Leverage|
|BitMex||Perpetuals and Futures||Up to 100x|
|Deribit||Perpetuals, Futures, and Options||Up to 100X|
|Xena Exchange||Perpetuals, Futures (to be added soon)||Up to 20x|
|BaseFEX||Futures, Perpetuals||Up to 100x|
|OKEX||Futures, Spot||Up to 3X|
|BitFlyer||Futures, Spot||Up to 100X|
|CoinFLEX||Futures, Perpetuals||Up to 20x|
|Binance JEX||Futures, Options, Spot||Up to 20X|
Trading in Bitcoin futures is obviously not child’s play, and given the complexities involved, caution is highly recommended. In taking futures positions, investors need to have a working strategy and a detailed understanding of how the markets work. Without such an understanding, trading on the futures market will be nothing short of guesswork.
There are two broad categories of Bitcoin futures traders:
- Hedgers, who strategically short-sell BTC, believing that prices will trade lower in the future. Hedgers short-sell Bitcoin futures primarily to protect their interests while simultaneously maintaining their BTC holdings. The difference in price if their prediction is right offsets the losses from their BTC holdings.
- Speculators, who take short positions in the expectation that BTC prices will fall while going long with the assumption that the prices will go up. Speculators are looking to make possible high returns from the price volatility.
Bitcoin derivative marketplaces come with different trading terms. Be it the amount of leverage or how they settle, these platforms offer different types of contracts, and these factors are important. Similarly, as in all crypto-related matters, the reputation of the broker crucial. Traders have to trust the exchanges with their assets when engaging in Bitcoin futures contract trading.
Fortunately, the market is now more diverse than ever. Bitcoin futures trading on regulated exchanges like CME has become a fully-fledged market. Regulated exchanges typically offer cash-settled futures contracts denominated in USD or BTC.
The daily notional volume of Bitcoin futures on CME exceeded an astonishing $1 billion on May 13, 2019. The platform has a 35$ margin requirement for futures contracts.
Strategies and Choosing a Reliable Cryptocurrency Exchange
Futures contracts come in variations, from stocks to funds and even bonds. As mentioned above, it is important to look at the margin requirements of particular trading platforms because Bitcoin futures have very high margin requirements.
The initial margin for hedgers is 100% of the maintenance margin, and the margin for speculators is 110% of the maintenance margin. Even though you can obtain margin offsets with other CME financial products, exchanges do not offer them immediately to new traders. Such fine details are things newbie traders have to learn.
The margin requirements could vary or even be higher, depending on the markets, which consequently affects the risk management style a trader adopts. Other considerations to make include the proximity to which futures prices and spot prices relate, the market liquidity, and how other traders and market makers go about their positioning.
Building a trade plan is a fundamental part of a strategy to achieve success in the futures trading landscape. Traders must therefore conduct a careful market analysis before executing any plan. Inevitably, to ascertain the viability of a trading plan, you need to formulate objectives for each futures trade as well as the risk involved.
In addition to risk, technical and fundamental analysis indicators can shape a trader’s plan to determine buy and sell signals. The type of orders you use will also be determined as you execute the trading plan and monitor market developments.
Last but not least, you should closely scrutinize money management and position sizing when trading in the volatile Bitcoin futures scene. You don’t necessarily have to do all the tracking on management, as you can monitor expert trader trends to shape your position decisions. However, the more you know, the better.
Finding the Right Bitcoin Futures Exchanges
Trading in Bitcoin futures is obviously a matter of trust because you need a reliable third party to facilitate the derivative market. A professional futures exchange can significantly enhance your chances of overall long-term success.
The following are considerations traders should make when deciding on an exchange.
- The fees and transfer methods the exchange supports
- The range of available contracts and assets
- The basic infrastructural features of the exchange
- How the exchange suits your trading style
In terms of trading fees, exchanges typically charge a deposit fee, a withdrawal fee, and a commission or brokerage fee, which is for setting up a trade or placing an order. The amount of the deposit and trading fees depends on the transfer methods available and the respective fiat currency rates.
For instance, when depositing money using a local bank transfer, you typically get lower transfer fees than when using international wire transfer. Similarly, doing transactions in USD is often cheaper because most other currencies first need to be converted into a major currency to circulate.
The features of actual trading include the following:
- Short-selling: You can go “long,” which means betting on a price increase, or “short,” which means betting on a price drop. Bitcoin has gone through both bull and bear markets in the recent past, and short and long futures contracts are a constant fixture in this sector.
- Leverage: In ordinary life, leverage is how much control you have over something. In trading terms, this control is magnified a certain number of times to increase a trader’s profits or losses. Leverage therefore allows users to potentially realize a large return on their holdings without needing to make an enormous deposit up front. Needless to say, it also carries massive risk because you bear an equal possibility of large losses. Leverage exponentially increases the power of a trader in the market. The maximum leverage of different platforms varies depending on the derivative products it lists.
- Hedging gives investors the ability to take out contracts opposite to the currently held position. For instance, you may bet on big price increases, but as time wears on, you may notice that this is an unreasonable risk. In such cases, you can hedge risks by taking out a smaller new bet for a price decrease in the same timeframe as the initial futures contract. In general, hedging is a mechanism to manage risks in your futures portfolio.
- Stop losses, take profits, and other trading features give Bitcoin futures traders the ability to automatically cash out and cancel their orders before the expiry date. These terms are, of course, in the contracts’ fine print and may or may not be a feature of an exchange’s futures trading landscape.
In terms of day trading, traders can either engage in contract trading or day trading. On Xena Exchange, margin trading is supported for contracts, including futures via margin accounts. Traders can have a maximum of five margin accounts. Through these accounts, traders can leverage their positions (up to 20x on Xena Exchange), maximizing gains (or amplifying losses) as a result. The maximum leverage applicable varies depending on the issuing platform: For instance, CME has a 3.33x leverage, BitMex supports up to 100x leverage, and OKEx has a 20x leverage.
In longer-term trading, entering Bitcoin futures contracts makes sense. A long-term contract does not require a lot of maintenance, and investors can analyze the market and make longer-term positions based on their projections. Upon the expiry of a Bitcoin futures contract, the trader gets a return depending on the performance of their contract and pockets the difference (or pay out the loss) in cash.
When making decisions about the kind of futures contract to enter, investors look at facts like...
- the Bitcoin supply and demand dynamics
- The influence of regulations and world events on Bitcoin prices
- Potential market-altering events, like a Bitcoin fork
The range of crypto futures on offer is also different. For example, CME offers Bitcoin futures only, Deribit has BTC and ETH futures, and OKEx has a more diverse range, including Bitcoin, Bitcoin Cash, and EOS.
Trading Bitcoin Futures on Xena Exchange
In the future, Xena Exchange will delve into the Bitcoin futures market to provide traders with a competitive advantage in the market. Xena Exchange is already a vibrant marketplace for derivatives.
Xena Exchange launched the Xena Listed Perpetuals trading engine in February 2019. Synthetic contracts on Xena Exchange offer up to 20x leverage, but that will rise to 100x leverage as liquidity builds up. Spot and margin trading are already live on Xena Exchange.
Xena Listed Perpetuals have the following advantages:
- They do not expire, which gives them an advantage over futures.
- They can be traded with up to 20x leverage.
- Trading perpetuals involves safe liquidation and mechanisms to protect against manipulation.Using their wealth of knowledge from margin trading rules, traders have a springboard to launch successfully into the Bitcoin futures market going forward.