Cryptocurrency Futures

Cryptocurrency futures are contracts between two investors that bet on a cryptocurrency’s future price. They allow investors to gain exposure to select cryptocurrencies without the need to purchase them. Cryptocurrency futures trade on the Chicago Mercantile Exchange and cryptocurrency exchanges.

Learn more about cryptocurrency futures, where you can find them, and how to trade them.

Key Takeaways

  • Cryptocurrency futures allow investors to speculate on the future price of cryptocurrencies.
  • Investors can choose from a variety of venues to trade monthly cryptocurrency futures. Some are regulated; others are not.
  • Cryptocurrency is known for its volatile price swings, which makes an investment in cryptocurrency futures risky.

What Are Cryptocurrency Futures?

Cryptocurrency futures are derivatives that let you gain exposure cryptocurrency without having to hold any. They resemble standard futures contracts for commodities or stocks because they allow you to bet on the price trajectory of an underlying asset. Cryptcocurrency futures attempt to minimize the risk of holding cryptocurrency.

The first Bitcoin futures contracts were listed on Cboe in early December, 2017. The Chicago Mercantile Exchange (CME) introduced Bitcoin futures contracts the same month. It first began trading on the Globex electronic trading platform, was cash settled and based on the CME CF Bitcoin Reference Rate.

Understanding Cryptocurrency Futures

Futures contracts of any underlying asset are derivatives of that asset’s price. These contracts buoght and sold between to commodities investors, and speculate about that asset’s price at a specific date in the future.

The contracts have a specific number of units, pricing, marginal requirements, and settlement methods that must be met by investors.

Below are the contract details for Bitcoin futures offered by CME:

  • Contract unit: 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate
  • Price quotation: USD
  • Trading hours: Sunday–Friday, 5 p.m.– 4 p.m.
  • Product code: BTC
  • Margin requirements: 50% cash of the contract amount
  • Listed contracts: Contracts listed for six consecutive months and two additional Decembers
  • Settlement method: Financially settled

Contract details for ETH futures at CME:

  • Contract unit: 50 ether, as defined by the CME CF Ether Reference Rate
  • Price quotation: USD
  • Trading hours: Sunday–Friday, 5 p.m.– 4 p.m.
  • Product code: ETH
  • Margin requirements: 60% cash of the contract amount
  • Listed contracts: Contracts listed for six consecutive months and two additional Decembers
  • Settlement method: Financially settled

Consider the following example for a CME Group bitcoin futures contract. Suppose an investor purchases two bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin, when the futures contract was purchased, is $5,000 each, meaning the total price for both futures contracts is $50,000. The margin requirements for bitcoin futures trading at CME is 50%, meaning that the investor has to deposit $25,000 as margin. They can finance the rest of the contract purchase by using leverage.

The contract’s value varies based on the price of the underlying asset (i.e., bitcoin). The Bitcoin Reference Rate is used by CME to determine the price of bitcoin. It is the volume-weighted average price for bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.

Depending on bitcoin’s price fluctuations, the investor can either hold onto the futures contracts or sell them to another party. At the end of their contracts’ duration, the investor has the option to either roll them over to new ones or let them expire and collect the cash settlement due. Some contracts, like the ones at Bakkt and ErisX, are physically settled. This means the investor will get final delivery of the commodity—in this case, bitcoin—upon expiration.

The steps to conduct a trade in bitcoin futures are the same as those for a regular futures contract. You begin by setting up an account with the brokerage or exchange where you plan to trade. Once your account is approved, you will need another approval – to begin futures trading in bitcoin – from the trading service provider. Generally, the latter approval is a function of funding requirements and the account holder’s experience with derivatives trading. 

The same criteria also play an important role in determining leverage and margin amounts for your trade. Futures trading makes heavy use of leverage to execute trades. At regulated exchanges and trading venues, the maximum leverage amount is regulated by government agencies. 

The story is a different one at unregulated exchanges. They have freedom to allow excessive risk-taking for their trades. For example, Binance offered a leverage of up to 125 times the trading amount, when it launched futures trading on its platform in 2019. That figure was revised to 20 times the trading amount in July 2021. Remember that higher leverage amounts translate to more volatility for your trade. Thus, the promise of high profits is offset by the danger of losing large amounts of money. 

The amount that you can trade depends on the margin amount available to you. Margin is the minimum collateral you must have in your account to execute trades. The higher the amount of the trade, the greater the margin amount required by the broker or exchange to execute the trade. 

Bitcoin’s risky and volatile nature means that the margin amounts required for trading their futures are generally higher as compared to those for other commodities and assets. CME bitcoin futures trading began with 100% margin, meaning traders had to put up the trade’s full amount as margin.

As of Feb. 2022, the exchange calls for 50% margin for bitcoin futures trading. Some exchanges, like Binance, also allow the use of other cryptocurrencies for margin. For example, you can use stablecoins such as Tether and USD coin as margin for your trades at Binance.

Brokerages offer futures products from many companies but they can have different margin requirements, one that is over and above the amount charged by the provider. For example, CME has a base margin requirement for bitcoin futures and brokerages like TD Ameritrade, that offer CME bitcoin futures trading as part of their product suite, can set margin rates on top of the base rate set by the exchange.

How Are Cryptocurrency Futures Different than Commodity Futures?

there is no physical commodity

Financially settled rather than taking delivery

Where Can You Trade Cryptocurrency Futures?

Initially, bitcoin futures contracts were traded at venues that were outside the jurisdiction of U.S. agencies. That changed in 2017, when Bitcoin’s seminal price run up laid the grounding for introduction of bitcoin futures in the United States, the world’s most sophisticated financial marketplace. The Cboe Global Markets (Cboe) was the first American exchange to offer bitcoin futures contracts on Dec. 10, 2017. CME followed a week later. Cboe discontinued bitcoin futures trading in 2019 due to a decline in trading volumes. CME overtook Binance as the world’s biggest venue for trading Bitcoin futures in Oct. 2021. 

According to data from crypto analytics firm, the biggest bitcoin futures trading platforms in October 2021 were:

  • CME: Headquartered in the United States, CME accounted for 22% or $5.68 billion of the total trading volume of $25.7 billion. 
  • Binance: The world’s biggest cryptocurrency exchange by trading volume also accounted for a hefty $5.66 billion of the total trading volume in bitcoin futures.  
  • FTX: A relative latecomer to the crypto trading ecosystem, FTX’s rise to popularity has been swift. The exchange’s U.S. subsidiary, FTX.US, witnessed a 608% growth in 2021, with peak trading volume of $812 million on 10th Nov 2021.  
  • Bybit: Started by a derivatives trading firm in 2018, Bybit was briefly the world’s second biggest futures trading firm in 2021 thanks to its 100X leverage and a referral program that paid out in Bitcoin. The company monitors US IP addresses to block American traders from its platform.  
  • OKEx: While it may not be as well-known as Coinbase Inc. (COIN) to U.S. audiences, OKEx ranks among the world’s biggest cryptocurrency exchanges with trading volumes that are dwarf those at its North American counterpart. Due to regulatory compliance reasons, OKEx is not available to US customers.

Bakkt, which is backed by NYSE owner Intercontinental Exchange, was launched in 2019 and advertises itself as an end-to-end solution to promote regulated price discovery and market liquidity. It also offers trading in physically-settled bitcoin futures and options. ErisX is a Chicago-based trading firm that offers cash-settled bounded bitcoin futures trading capability that limits exposure to the cryptocurrency by setting upper and lower bounds.

You can also gain exposure to Bitcoin futures by trading Bitcoin ETFs. The ProShares’ Bitcoin Strategy Fund (BITO) tracks CME bitcoin futures. The exchange-traded fund (ETF) started trading on Oct. 19, 2021, as the first bitcoin ETF. As of Feb. 2022, there are three bitcoin ETFs based on CME bitcoin futures contracts – ProShares Bitcoin Strategy Fund, VanEck Bitcoin Strategy ETF (XBTF), and Valkyrie Bitcoin Strategy ETF (BTF).

Advantages of Cryptocurrency Futures Trading

The main advantage of trading bitcoin futures contracts is that they offer regulated exposure to cryptocurrencies. In a volatile ecosystem with wild price swings, that is a significant point. Bitcoin futures contracts at CME are regulated by the Commodities Futures Trading Commission (CFTC). This offers a measure of confidence and recourse to institutional investors, who comprise a majority of traders in such contracts. 

Bitcoin futures also simplify the process of investing in Bitcoin. The investor does not need to create a bitcoin wallet or put money into custody solutions for storage and security while trading because there is no physical exchange of bitcoin. An added benefit in cash-settled contracts is that it eliminates the risk of physical ownership of a volatile asset. 

Bitcoin futures contracts are a relatively safer way to dabble in bitcoin without getting burnt because futures contracts have position and price limits that enable investors to curtail their risk exposure to the asset class. 

These position limits differ between exchanges. For example, CME allows a maximum of 2,000 front-month futures contracts and 5,000 contracts across different maturities. Binance, the world’s biggest cryptocurrency exchange by trading volume, has a position limit adjustment feature that enables manual reconfiguration of limits based on past trading history and margin amounts.

Special Considerations While Trading Bitcoin Futures

While the number of venues offering bitcoin futures trading has multiplied over the years, it is still nascent in the numbers of its participants and trading volumes as compared to other commodities. This means that bitcoin futures trading has its own set of peculiarities. Some of them are outlined below: 

  • Trading volumes in bitcoin futures trading can mimic those of its spot markets counterpart. Price fluctuations can also be high, especially during volatile stretches of the cryptocurrency’s price. During such times, bitcoin futures may appear to follow spot market prices or trade at a significant premium or discount to bitcoin spot prices. This means that bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. The SEC warned investors about the pitfalls of trading bitcoin futures in June 2021. “Among other things, investors should understand that bitcoin, including gaining exposure through the bitcoin futures market, is a highly speculative investment,” the agency stated. 
  • Except for select trading venues, such as CME, bitcoin futures trading occurs mostly on exchanges that are outside the purview of regulation. Among the world’s biggest platforms for bitcoin futures, only CME is regulated by the CFTC. Binance and FTX, the world’s second- and third-biggest platforms by trading volume, have opened U.S. subsidiaries only recently. 

Cryptocurrency Futures Options

Bitcoin options are a relatively new development. CME introduced trading in bitcoin options in Jan. 2020.  

Bitcoin options work like standard options contracts in that they are a right, and not an obligation, to buy bitcoin at a set price on a future date. In this case, the asset is represented by bitcoin futures contracts traded at the CME, with a single options contract equivalent to a single futures contract consisting of five Bitcoin. Options contracts for six consecutive months are available at a time at CME. They expire monthly on set dates, with two additional December contract months.

Traders can buy Call options, if they think the price of Bitcoin will go up. Alternately, a Put option is a bearish bet that the cryptocurrency’s price will decline in the future. The gains and losses in both cases are different. In a Call option, gains may be unlimited (because the price can go up indefinitely) while the losses are limited to premium paid for the contract. In a Put option, losses may be unlimited (because the price may go all the way down to zero) while the gains are limited to premium paid for the options contract. 

Again, Bitcoin’s price volatility makes it a risky asset for options trading. The implied volatility of options contracts is high, meaning that the price of a single bitcoin option is also high. High prices can magnify trader losses.

What are Bitcoin futures contracts?

Bitcoin futures are derivatives that enable investors to gain exposure to Bitcoin (BTCUSD) without having to hold the underlying cryptocurrency. They are like futures contracts for a commodity or stock index because they enable investors to predict the future price trajectory of an underlying asset. 

Where are bitcoin futures contracts traded?

Bitcoin futures contracts are traded at most major cryptocurrency exchanges. As of Oct. 2021, the top five platforms for trading bitcoin futures contracts by trading volume were the Chicago Mercantile Exchange, Binance, FTX, Bybit, and OkEx.

What are the advantages of trading bitcoin futures contracts?

Bitcoin futures contracts provide exposure to cryptocurrencies, a volatile asset class with potential for significant profit gains. They also reduce expenses and simplify complex tasks associated with investing in cryptocurrencies. Bitcoin futures contracts are cash-settled. Thus, investors do not need to take possession of physical bitcoin upon contract termination. Some venues offer 24X7 trading.

What are some special considerations of trading in bitcoin futures contracts?

While the number of venues offering bitcoin futures contracts has multiplied over time, they still do not have adequate liquidity and trading volumes to absorb the volatile price changes of its underlying asset. As a result, they may not offer a completely effective immunity against bitcoin’s volatile price changes. 

How can you invest in bitcoin futures without putting money into futures contracts?

You can invest in bitcoin ETFs based on CME bitcoin futures contracts. Alternately, you can also put money into bitcoin options traded at CME. The options are based on futures contracts traded at the same exchange.

The Bottom Line

Investing in bitcoin futures contracts is similar to that for standard futures contracts. However, bitcoin’s peculiarities – price volatility and clear guidance on regulation – makes investing in bitcoin futures a risky affair.




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