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How To Invest In Bitcoin Futures

INVEST IN BITCOIN FUTURES

May 10, 2021 | 

JOHN K MWANIKI |  0 Comments| 

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Get Into Cryptocurrency Trading Today

Futures have been in the financial market for many years, but they only entered the cryptocurrency market in 2017. Following that, many exchanges have expressed interest in opening bitcoin futures providing users with a new way to invest and profit from the digital currency.

What are futures?

In the financial market, futures refer to a contract between two parties to buy or sell a specific asset at a set price on a predetermined future date. When the agreement reaches the expiration date, the parties must trade at the agreed price whether the specific asset has risen or fallen in value over that time.

The advantage of futures contracts is that they allow the users to speculate on the price trends of the underlying asset. Investors also use them to hedge against price fluctuation risks which are very beneficial, especially when the specific asset is volatile.

In a futures contract, one individual holds a long position while the other has a short position. Whenever you take a long position, you agree with the other party that you will buy the underlying asset at a specific price in the future when the agreement expires. In contrast, when you take a short position, you agree to sell the underlying asset at a predetermined price when the agreement expires.

What are bitcoin futures?

Bitcoin is the largest virtual currency by market capitalization, but it is very volatile. Like commodities and stock futures, bitcoin futures allow users to speculate on bitcoin prices and protect themselves against the high volatility of the currency's value.

For instance, you can agree to a futures contract in March to purchase one bitcoin at $4000 in September when the contract expires, which is six months later. Or you can agree to sell your bitcoin for that price when the contract expires, so you hold a short position. If you are the buyer in the contract, you hope the value of bitcoins to rise so that you can buy it at a lower price below the market value. But if you are the seller, you want the market value to decrease, so you profit if the bitcoin price falls.

Investors and traders are into bitcoin futures, especially with big players such as CME Group, TD Ameritrade, Bakkt in the space. CME facilitates bitcoin futures every month for cash. When bitcoin futures operated on the CBOE (Chicago Board Options Exchange) in 2017, they were overwhelmed and have since stopped offering new contracts. Bakkt, a futures platform provided by the Intercontinental Exchange, facilitates around 11,000 futures contract trading daily and monthly-basis bitcoin futures for physical delivery.

Benefits of trading bitcoin futures

Another notable benefit of bitcoin futures is that you can trade the contracts on specifically regulated exchanges. Bitcoin futures are traded on exchanges regulated by the Commodity Futures Commission, offering big institutional investors the confidence to participate without fear of being scammed. It makes bitcoin trading attractive for investors and traders who are hesitant to deal with cryptocurrency exchanges directly. 

Again you get to speculate on the price of bitcoin without holding any bitcoins. The futures are settled on cash, so you don't need a bitcoin wallet, and no physical transactions of bitcoins are involved during transactions.

Where to trade bitcoin futures

You can trade bitcoin futures on various regulated exchanges, including the CME Group. TD Ameritrade facilitates trading in bitcoin futures with oversight from the SEC, FINRA, and CFTC. The platform is a self-regulatory platform under the NFA.

The HongKong based crypto exchange OKEx also facilitates bitcoin futures contracts trading and also BitMEX, one of the popular crypto exchanges.

Understanding the risks of bitcoin futures trading

Before you start trading bitcoin futures, it is essential to understand the risks of futures contracts. Keep in mind that there is a winner and loser for every bitcoin futures contract, and the risk is that you could end up with less money than you invested with.

To start trading futures, you have to open an account with bitcoin futures registered broker to maintain your account and guarantee your trades. Brokers that facilitate bitcoin futures trades are known as FCMs (Futures Commission Merchants) or IBs (Introducing Brokers). Trading bitcoin futures is as vital as where you trade, so you have to select your trading platform keenly. Reputable platforms facilitating bitcoin futures trading are usually registered under NFA (National Futures Association) and are under the regulatory oversight of CFTC. 

For beginners, bitcoin futures feature very high margin requirements. For instance, the CMEs margin requirement for bitcoin futures contracts is 37% of the price of the specific futures contract. The first margin of a hedger is 100% of the maintenance margin, while the margin for speculators is 110% of the maintenance margin. A futures commission merchant can have higher margin requirements based on the trader and the market.

Then you need to develop a trading strategy based on your goals for each trade, the risk level you are ready to take, and examine how much risk is acceptable for every transaction. Implementing the best trading plan based on a careful analysis of the market is the first step to becoming a savvy trader in bitcoin futures. Determine the technical and fundamental analysis indicators you plan to utilize to identify buy and sell signals and how you plan to track the price developments and the market at large.

When trading in the volatile bitcoin futures space, you must consider money management plans and position sizing. But if it seems challenging to come up with your trading plan, you can what other savvy traders do.

When you enter a futures contract, there are three ways to exit your position:

  • Offsetting- creating other futures contracts of similar value and size to make your effective obligation zero as they balance.

  • Rolling over refers to offsetting a position but with a further into the future expiry date.

  • Expiry- the parties with the futures contract sell and buy at the agreed price.

CONCLUSION

Bitcoin futures is an excellent way to profit if you can take on risks and implement better trading strategies.

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