Bitcoin Futures: Basics of Trading

The cryptocurrency market is not stable, hence trading on exchange becomes difficult, this has forced people to trade without certainty of profit or loss. This is where Bitcoin futures comes in. The basics of Bitcoin futures trading are to allow people to lock the price of Bitcoin. Here’s what I mean, if they buy Bitcoin through Bitcoin futures contract at $4,000, even if the price rise to $12,000 the exchange price would still remain $4,000. 

How to invest in Bitcoin Futures

Investing in futures contract is pretty simple, let’s say you take out a futures contract in May of 2019 that by December same year you are going to buy Bitcoin for $5,000. If someone agrees to sell for that price it may seem weird that someone would agree to sell his Bitcoin at that price when it’s the current price is more. But it would all make sense if, by December, Bitcoin drops below $5,000 as the seller would make a profit despite the dip. 

Over the years, bitcoin futures trading has become very popular among people not just as a means of stabilizing the prices of the commodity, but also as an investment opportunity. An investor risks everything each time he tries to transact on an exchange. 

Futures tries to ensure that the market is regulated. Although this technique is old as will be explained later in the article, it is supported investors get derivatives when trading. 

A retail investor interested in futures product needs two things; equity index and price discovery

What are Bitcoin Futures?

Bitcoin Futures was developed to help Bitcoin investors get access to this virtual currency even without actually holding a Bitcoin token just like Bitcoin ETF (Horizons ETFs) . Sounds confusing right? If you have experience in stock tradingyou will already be familiar with futures contract and the role it plays for commodity or stock index. 

The features of Bitcoin futures give investors the ability to speculate on the future price of Bitcoin, that’s probably how it got its name “Bitcoin future”. 

The Chicago Mercantile Exchange (CME group) gives investors the opportunity to exchange monthly contracts for cash settlement. This means an investor will get rewarded in cash instead of Bitcoin, that’s what micro Bitcoin Futures entail. 

CME Bitcoin is not trying to replace the central bank rather it is going to create an asset class for the Bitcoin futuresmarket and another Bitcoin trading as well as trading of other digital currency. 

Bitcoin Futures Contracts

Futures contracts as a trading concept precede Bitcoin, in fact, it dates as far back as 17th-century Japanese samurai. The payment was valued with rice, but the price of rice rises and falls due to the season. This makes the value volatile just like our currencies today. The Japanese samurai in an attempt to maintain the value of what they were paid for signing a contract state the equivalent of rice given to them stays the same way irrespective of the current value. 

Trading Bitcoin contracts with futures contracts is a smart investment only if you have the key and exposure to how cryptocurrency technology works, how prices of the different cryptocurrencies, the right exchanges and data, and chart else you will end up being a victim of cryptocurrency trading volatility. 

For Bitcoin miners, or institutional investors, getting Bitcoin spot in the futures market or spot market will seem a little difficult compared to Bitcoin exchange. Crypto derivatives offered when trading futures helps remove overall cryptocurrency risk. 

Futures Trading

Just like your regular stock trading, you just create an order to either buy or sell over a period of time. Whoever matches that order gets to buy when the time comes. Once an order is made, it enters the order book, once the entire transaction is completed it automatically clears from the order book.

Futures contracts and hedging

Hedging is another way traders can benefit from futures contracts. Hedging simply means reducing the level of risk. This is a two-way decision because as we all know, Bitcoin is volatile. You can either profit or loss. 

Futures account of crypto futures record highs when there is regulated Bitcoin Futures as well Bitcoin options. It naturally amounts to better market conditions. 

Here’s an example of how hedging works, imagine a trader buying 3 Bitcoin at $5,000. He believes that the value of Bitcoin is going to rise at the end of the month but still wants to stay safe in case it goes down. 

To stay safe, remain in the margin requirement, and protect his position, he can enter a futures contract and sell just one Bitcoin for $5,000 by month-end, 

If the price of Bitcoin goes up by month-end she will make a profit by selling for $5,000. 

On the other hand, if the price goes down, he won’t be losing much. So as much as hedging reduces a trader’s risk, it also reduces the profit. 

Bitcoin futures contracts when traded during trading hours are tricky. Knowing the right unit to buy or sell is risky. So hedging may reduce the volume of your overall cash profits, however, it benefits traders if the bitcoin price falls. 

CME Bitcoin future initial margin helps traders in the Bitcoin market hedge funds. 

Final Thoughts

The number of BTC investments an investor makes accounts for the level of risk the investor is faced with. The prices of cryptocurrency are not stable neither is BTC, in order not to lose too much cash trading Bitcoin traders should utilize BTC futures and their derivatives.

This post was last modified on June 13, 2021 10:39 pm

Shawn Du'Mmett

Former IT development and consultant, remote team and collaboration expert, PM, CCO, writer, dreamer, idealist looking to collaborate with global teams on a global teal/turquoise organisation. Shawn's dream is working together openly, to get what writers need and want, and to solve biggest global problems. He is building a collaboration system from the start that everyone can own and define, allowing them to work together, to decide how it works and to their highest ideals.

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