As cryptocurrencies have made their way into mainstream culture over the last few years, more investors are becoming interested in trading Bitcoin and other cryptocurrencies, such as Ethereum and Litecoin, because of their inherent volatility and potential reward.
Today, spot trading has led to the adoption of financial instruments that allow traders to speculate on the future price of Bitcoin. The best part? These products do not have any implied ownership rights; this means the volume/amount of Bitcoin you have has little to no effect on your potential reward. This post explores what Bitcoin futures are and how they work.
What are Bitcoin Futures?
Bitcoin futures are contracts between two parties agreeing to buy or sell Bitcoins at a set price in the future. They act as both hedging tools and investment opportunities for those involved with cryptocurrency trading.
It's a similar concept to any other stock or commodity index future contract, allowing traders worldwide to speculate on its value with minimal risk.
How Do Bitcoin Futures Work?
Bitcoin futures is an agreement between two parties to buy or sell Bitcoin on a specified date in the future at a predetermined price.
It's pretty similar to futures trading in traditional finance assets; you can either go long or short with these contracts depending on your market view, strategy, risk tolerance level, and more. It presents investors with an alternative to speculate on the price of Bitcoin without having to own it.
Types of Cryptocurrency Futures Contracts
Although cryptocurrency exchanges rapidly adopt Bitcoin futures contracts; however, there is no single trading platform that has it all! This means traders will have to compare apple-to-apple, group lines of the same variety to get the most suitable exchange and the type of Cryptocurrency future contracts that suit their trading style. Below are four types of cryptocurrency future contracts:
Futures with Cash Settlement
Cryptocurrency futures have aspects of a standard contract from traditional markets, including settlement and expiry date. During the cash settlement, all contracts are settled in US dollars or a cryptocurrency at the specified date and time of expiration, without a need for physical delivery of the underlying.
Futures with Physical Delivery
Future with physical delivery is a type of futures contract which requires an underlying asset to be delivered within a specific date.
Cryptocurrency futures with physical delivery were first introduced by Bakkt, an entity backed by Intercontinental Exchange (ICE). The only difference it has from a regular future contract is that it has a stipulated time limit, and during the delivery, settlement takes place in the underlying cryptocurrency.
Today, perpetual contracts are becoming more and more popular. They represent another type of cryptocurrency future that has no expiration date!
This potential has led to the global adoption of this contract by most leading exchanges, who want their users to access top-quality products without losing out later down the line.
The funding rate is the primary mechanism that helps perpetual contracts stay up with the spot price as much as possible. Traders are paying each other based on their open positions depending on whether there is more shorts or longs. The fee is called the funding rate.
A Brief History of Bitcoin Futures
Bitcoin Futures have been around for a while but were traded as unregulated assets by most crypto exchanges. At the end of 2017, a regulated Bitcoin future was introduced; within the first week in December, two humongous Future Exchanges adopted the technology; the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE)
With the introduction of this instrument by regulated venues, the crypto community experienced a surge, as many thought that the market would significantly increase liquidity because of the influx of new investors.
However, it was a different ball game for most trading platforms that wanted to adopt this financial instrument. And because of the increase in cybersecurity issues, regulation, and price volatility, most exchanges found it difficult to help investors make the most of their investments.
Pros and Cons of Bitcoin Futures
The Benefits of Futures Trading
Cryptocurrency futures are a great way to invest and make potential profits. Here are some advantages you should consider:
- Future Markets are very Liquid: Bitcoin futures are traded in huge numbers daily; this gives room for increased liquidity. The presence of sellers and buyers ensures orders are placed quickly.
- Hedging: Cryptocurrency offers traders a perfect alternative for hedging their portfolios.
- Flexible trading strategies: Crypto futures are a better choice for those who want to make money on the spot. You can go short without blockers; that's one of the outstanding features! In addition, traders can maximize profit by developing different strategies.
- Higher leverage for potential profits: Using a derivative account to trade crypto futures with leverage is more substantial. For example, when leverage is set to 100x, this means you may put down $10 and gain a position worth $1,000. However, it is essential to consider the potential risk involved before leaping.
- Diversity of a Portfolio: Futures traders can access markets in a broad range of asset classes. Using only one traditional "stocks/bonds/cash" allocation model would not be enough to diversify your portfolio and protecting yourself against market risk for any period or economic environment - but with futures trading as an option -is icing on the cake!
Risks of Futures Trading
Futures trading is a high-risk but lucrative and fun way to make money. However, traders need to be familiar with all the dangers of this type of trades and possess skills in managing those risks! Below are some risks associated with feature trading:
Poor Timing: Timing is everything! You need to know a bit about the market trends, such as when prices will probably rise or fall? It's not enough to guess. Timing your trades can net significant returns and help you limit losses.
Volatility: Volatility can be a torment or blessing to traders, since predicting market movement is not 100% guaranteed.
High risk: Considering the leverage involved, Bitcoin futures are one of the riskiest trading instruments. Newbie traders should trade with caution and manage risk properly.
How Profitable is Bitcoin Futures Trading?
Crypto futures trading can be very profitable if proper risk management is implemented. This activity could become more lucrative than simply holding onto dollars or euros in a volatile economy where prices are continually fluctuating.
Suppose you buy 100 Bitcoin futures contracts at $30,000 per BTC and sell 1,000 futures at $31,000 per Bitcoin. At the close of the contract, you will be left with a profit of $100,000.
However, we recommend you do your research beforehand and have a reliable strategy so that your profits aren't offset by losses.
Who Should Trade Futures?
Anyone can trade futures; however, the reward depends on your initial capital, technical skills, exchange, and other considerable factors. Futures provide an exciting new way to invest and trade; it's an excellent choice for investors who want to trade on margin to achieve higher portfolio efficiency.
Unlike spot markets that only allow to buy and sell, cryptocurrency's future allows more diverse strategies, including spreads betting on price fluctuations between different pairs, which gives investors an edge to take advantage of price fluctuation either way.
What to Consider Before Trading Futures?
Compared to traditional trading, futures trading has many similarities but is considered entirely different. Below are telltale factors to consider:
Leverage is the all-important feature of margin trading, which has become popular in recent years. By using leverage, traders can boost potential profits and reduce risks by doubling or even tripling their investment amount for each trade they place.
We recommend using high-risk/high-reward strategies to investors who're experienced and confident enough since market liquidations could lead to losses.
It's vital to assess a new asset's liquidity before investing in it. Liquidity explains how an asset can be converted into cash without affecting the market price. A trader needs some measure by which they may compare other tradable items so that risk-management techniques can be adequately implemented.
Diversifying your investment across multiple trading instruments and positions helps you manage risk. If an asset declines in price, it won't be as bad for the investor who hedged by entering a short position as a backup. This strategy is an excellent alternative for traders and hedgers alike!
There are many opportunities in the cryptocurrency market, from day traders to long-term investors. Short-term fluctuations can be unpredictable, but they also come with higher rewards for those who know how and when to buy low or sell high.
If you trade regular cryptocurrency futures settled in cash, it's important to pay attention to the expiry date because this is when your settlement funds will be delivered. However, before that happens, you can sell an open contract and record profit or loss depending on whether spot prices change from what they were at the inception of the contract.
Commodity Vs. Crypto Futures: Similarities & Differences
Bitcoin futures share many similarities with traditional financial contracts. The US Commodity Futures Trading Commission (CFTC) considers Bitcoin a commodity, so it should come as no surprise that these two markets have so much in common!
Cryptocurrency and commodity futures have greater implications for sellers and buyers compared to mere payment or receipt of contractual price. Both futures have a real use case that provides investors with tangible advantages.
Cryptocurrencies and commodities futures takes place in centralized and decentralized marketplaces. Crypto futures have a wide range of peer-to-peer and centralized platforms. Similar to commodity future.
Cryptocurrency futures differ from commodity futures because digital assets such as Bitcoin can be more volatile than a physical asset like gold or silver, which makes crypto futures much riskier compared to their analogs on the traditional markets where risks come with expiration dates & settlements -periods.
Where to Buy Bitcoin Futures?
One of the most important and difficult decisions you'll make for your long-term success is finding an experienced cryptocurrency futures exchange platform. At some (CME), you must be a certified trader, while others have incredibly high commission fees. You need to consider all of these factors before deciding Bitcoin futures trading platform.
When it comes to low commissions, Redot, an EU-regulated cryptocurrency exchange, is set to start its Bitcoin futures market soon. Redot is known for its ease of use and low trading fees across all of its platforms, making it a good choice. You can visit Redot derivative page to join the futures whitelist.
Frequently Asked Questions
Am I Eligible to Trade Bitcoin Futures?
Yes, everyone is eligible to trade Bitcoin futures, although the outcome varies and depends on certain factors, such as your preferred exchange, knowledge of technical analysis, and your risk appetite.
What Special Considerations Should I consider Before Trading Bitcoin Futures?
- Ignore lofty promises
- Only trade with funds you're willing to lose.
- Beware of Leverage
What are the Transaction Fees for Bitcoin Futures Trading?
The fees are not very noticeable for most traders and are usually around 0.01%, which is another advantage compared to traditionally higher spot trading fees.
Key Takeaways on Bitcoin Futures Trading
- Bitcoin futures are a relatively new derivative instrument traded on traditional exchanges. These instruments are considered hedging tools and investment opportunities for investors involved in cryptocurrency trading.
- If you're interested in investing or simply want to hedge your bets against the volatility inherent in this market, then Bitcoin futures may be right up your alley. Redot offers investors access to Bitcoin futures contracts as part of its services.
If you're interested in trading Bitcoin futures, or any other derivative, then contact Redot today. Our team of experienced financial experts can help make your cryptocurrency investment dreams come true by providing the best possible advice and guidance.
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.