How to prepare for trading Bitcoin futures? Trading Bitcoin futures is almost similar to trading futures contracts for a stock or commodity index in which as an investor simply have to speculate on the future prices.
However, it is easier said than done, and therefore, you will need to know a lot of things before you get started.
And, for that, this is the right place to be. In this article, you will come to know about everything that you need to be successful in and make profits by trading Bitcoin futures.
Bitcoin is the largest and most popular digital asset in the world and Bitcoin futures track the movements in its price.
If you want to gain exposure to Bitcoin but do not want to hold the underlying crypto coins, probably the best way is to invest in Bitcoin futures.
These are legal contracts and are as good as the traditional futures contracts.
However, in Bitcoin futures contracts you are allowed to buy or sell Bitcoin at your speculated price at a future date.
The primary objective of the Bitcoin futures is to offer protection to the investors against price volatility of the asset and its adverse movements.
Apart from that, the Bitcoin futures also work as an alternative tool for the crypto traders to guess the future prices of Bitcoin.
The working process of the Bitcoin futures contract involves taking a long position if an investor expects the prices of the coin to rise in the future.
On the other hand, if a fall in its price is expected, an investor can take a short position in order to minimize the impact of losses due to the fall in price of Bitcoin.
- How to Prepare for Trading Bitcoin Futures?
- Understanding Bitcoin Futures
- Where to Trade?
- How Does It Work?
- Contract Specifications
- Special Considerations
- Steps to Follow
- Trading Micro Bitcoin Futures
How to Prepare for Trading Bitcoin Futures?
If you invest in Bitcoin for a long term, there may be times when you experience bear markets occasionally.
This happens due to the changes in the market sentiments which cause some sort of uncertainties.
During these periods of uncertainties, there is a very little chance for your Bitcoin portfolio to gain much, if it does at all.
It is during these times when you will find that the Bitcoin futures contracts to be most helpful to protect your investments against the negative aspects and its downside risks.
When you deal with Bitcoin futures, you can use your experience of stock or commodities futures, if you have any, for speculating on the future price of Bitcoin.
You are allowed to trade regulated or unregulated Bitcoin futures from a variety of places to make the most out of the volatile price swings of Bitcoin.
However, such an investment is quite risky, as it is with any type of crypto investment.
It is therefore advised that you trade with the regulated ones and also make sure that you go for those exchanges that deal with self-certified Bitcoin futures contracts in accordance with the CTFC or the Commodity Trading Futures Commission.
Check their commitment level to the traders as well while selecting a broker. Also, check from the report data of CTFC the following:
- The type of traders available with them that you want to trade with
- The size of the positions held by these traders in particular in the market and whether these are long or short and
- The changes in the chart itself over time.
Though futures contracts carry significant and unique risks, they are quite good, regulated and more stable settings that can potentially allow you to gain significant exposure to Bitcoin as an item of trade.
However, experts suggest that you judge yourself first to know whether or not you are fit for trading Bitcoin futures.
For that, they suggest that you should consider a few parameters very carefully which include and are not limited to:
- Your experience
- Your financial objectives
- Your available financial resources and several other pertinent conditions.
Now, before you start trading with Bitcoin futures, there are a few other things that you should also know.
The first and most important thing to know about such trades is that in this process there is no actual exchange of Bitcoin.
This is because these futures are basically contracts that are settled financially on the date of expiration and therefore no coins change hands in the process.
It also means that you will not need any crypto wallet on any trading platform for Bitcoin futures trading.
This is, once again, because the futures contracts will be settled with cash payment on the delivery date.
You may even offset them by reversing out of your positions when the delivery date comes near.
However, there is a catch here which you should also know.
It is that the holders of the Bitcoin futures contracts will be paid the difference between the purchase price and the settlement price if the position held by the buyer or seller of a Bitcoin futures contract illustrates a profit made at the delivery date.
Now that you know about the Bitcoin futures a bit, it is time to know exactly how you can trade them, which is as important as knowing exactly where you can trade them.
Therefore, first, you will need to make sure that you choose a registered, reliable and reputable broker to start with.
Ideally, they should be the ones who are a member of the NFA or the National Futures Association.
They should also be the ones who work according to the regulatory oversight of the CTFC.
The futures brokers are usually known as FCMs or Futures Commission Merchants or IBs or Introducing Brokers.
Once you choose the right FCM or IB, you will need to open an account with them to maintain it, trade actively, and guarantee your trades.
At this point it is good to know that there may be some specific requirements to qualify and get permissions on your account depending on the policies of the broker you choose.
Therefore, make a few checks on them and find the requirements which may include the futures trading approval, exchange margins, and even a non-retirement account.
Apart from that, check the funding requirements.
Some brokers may need you to clear your funds fully in your account before you can use them to trade the Bitcoin futures contracts, or any futures contracts for that matter.
Such deposits may take even several business days to get cleared depending on the deposit methods you choose.
Deposits through wire transfers usually take a business day to get cleared.
Understanding Bitcoin Futures
You should have a very clear understanding of Bitcoin futures in order to know what you are getting into.
For that, you will first need to understand what virtual currency actually is.
It is basically a digital illustration of value. It serves different purposes such as:
- As a unit of account
- As a medium of exchange and
- As a store of value.
However, it does not have a legal tender status though these virtual currencies can be exchanged for US dollars or other currencies sometimes all over the world.
These currencies are not backed by any central bank or by any government, and hence are risky.
The value of the digital currencies primarily depends on the market forces and is derived from several external factors and principles of economics such as the supply and demand relationship.
Therefore, the digital currencies are more volatile in nature than the conventional fiat currencies.
You may make profits or incur losses by trading virtual currencies due to its price volatility. However, these are augmented in margined futures contracts.
Bitcoin futures contracts, on the other hand, serve a set of unique purposes and it varies according to players in this ecosystem. For example:
- For the Bitcoin miners, the futures serve as a means to lock in prices to guarantee a secured return on their mining investments irrespective of the trajectory of the future price of the coin.
- For the crypto investors, the Bitcoin futures serve as a protection against the positions held by them in the spot market.
- For traders and speculators, the Bitcoin futures can be used to make both short term as well as long term profits since they can move in and move out of such trades frequently.
Therefore, Bitcoin futures can help everyone in the crypto ecosystem to bet on an increase in the price of the coin in the future in the spot market simply judging by the direction of the price movements.
They can either short or long their futures to create a hedge and stand a better chance to make more money even if the price moves in a direction that is opposite to the one that they have speculated and put a bet on their contracts.
There are several different types of Bitcoin futures available in the market today, and you can choose one that you like depending on its availability on the particular platform you have chosen.
For example, if you choose to team up with Binance, the largest crypto exchange in the world in terms of popularity as well as in trading volume, here is what you get to choose from:
- Bitcoin Futures Perpetual and
- Bitcoin Futures Quarterly.
These are their two flagship futures contracts offered by them that differ in two basic aspects namely:
- Expiration – If you choose the quarterly contracts of Bitcoin futures on Binance it will expire according to the respective cycles of the calendar. Typically, it has four such cycles namely March, June, September, and December. On the other hand, if you choose the Bitcoin futures perpetual contracts it will usually not come with any date for expiration.
- Funding Fees – Usually, Binance do not charge any fees from funding rates. This is because everything happens between the users directly. The traders on the platform ideally receive a funding or pay it according to their positions. On the other hand, the Bitcoin futures perpetual contracts usually come with a funding fee which are actually periodic payments made to the traders and are typically paid peer-to-peer.
Apart from the fact that you do not have to hold the underlying coins but still gain a significant exposure to the Bitcoin ecosystem, there are several other benefits enjoyed when you trade Bitcoin futures.
The participants in Bitcoin futures contracts trades have a lot of confidence because these contracts are typically traded on an exchange regulated by the Commodity Futures Trading Commission. This attracts big institutional investors.
In Bitcoin futures contracts trading there is no risk of holding the volatile crypto coin that can experience steep price movements.
Risks are also minimized because all futures are financially settled through cash.
Also, you can place position limits and price limits on Bitcoin futures contracts which will cut back the risk exposure even further to this particular asset class.
There is no addition to the overall costs of trading when you trade Bitcoin futures contracts.
This is because you do not need any wallet since there is no physical exchange of coins involved in this method.
Holding crypto coins in custody can not only increase the risk of losing but can also prove to be a costly affair.
Bitcoin futures contracts trading also offer a lot of flexibility, especially to the non-holders of Bitcoin, to make some quick profits by simply speculating on the price of the coin.
And, all profits made by you will be settled in cash. For example, a Bitcoin futures contract with USDT will be settled in USDT.
You will also be able to use leverage to magnify comparatively small movements in price via Bitcoin futures contracts and that too by spending just a fraction of the total cost.
This means that you will be able to make maximum profits with little time, money, and effort.
In the entire crypto economy, Bitcoin futures are considered to be one of the most liquid markets.
The monthly volume in this particular segment of the crypto space adds up to trillions of dollars.
Therefore, such liquidity will minimize the risks even further and you will not incur much slippage because you will always find a buyer willing to purchase your coins on the other side of your given position.
Finally, Bitcoin futures will allow you to further diversify your crypto portfolio with little risks.
You will also be able to diversify your trading strategies by choosing different sophisticated options such as arbitrage, short selling, pairs trading and more.
This will allow you to make more profits.
Where to Trade?
There are lots of brokers available out there all over the world to trade Bitcoin futures contracts but it is always better to choose a reliable and regulated platform.
Remember, the crypto exchanges were the first ones to offer their users the opportunity to trade Bitcoin futures but they are risky due to the lack of regulations.
Serious traders often choose reliable platforms such as CME or Chicago Mercantile Exchange.
Also, there are a few international exchanges that are backed by the NYSE such as Bakkt that provide a better end-to-end solution with respect to market liquidity and price discovery.
There are also other exchanges based in Chicago, Seychelles, and of course, the Malta-based Binance, which is the largest exchange that offers Bitcoin futures contracts trading options.
Binance is, in fact, the number one exchange in terms of open interest contracts offered by it, but, if you choose to deal with them please keep in mind that it is not regulated by the US authorities.
How Does It Work?
The working process of the Bitcoin futures is more or less the same as the conventional futures trading in terms of its setup and the rules to follow during trading.
You can trade only through an account set up with the exchange or brokerage and after you receive an approval for the same from them.
When you execute your trades, you can use leverage heavily depending on the allowance and current policies of the exchange chosen.
In order to trade your Bitcoin futures contracts, there are few major considerations to make such as:
- The margin requirements and
- The contract details.
Margin requirements involve the minimum collateral required by you to have in your account in order to make your trades.
This requirement is directly proportional to the amount of trade.
This means that if you want to execute a higher amount in your trade, you will need to put in a larger margin amount.
Once again, the margin requirements may vary from one exchange to another, and it is usually higher because Bitcoin is extremely volatile and a risky digital asset.
It is also very necessary to understand the contract specifications of Bitcoin futures in detail.
This will enable you to know what exactly you are getting into.
Though the contract details may vary from one crypto exchange to another, here are the basic contents that you should look for:
- Contract Unit – which should be according to the Bitcoin Reference Rate
- Price Quotation – which must be ideally based on US Dollars and cents for each Bitcoin
- Trading Hours – which may vary depending on the exchange you choose and
- Minimum Price Fluctuation – for both outright and calendar spread.
In addition to the above basic points in the Bitcoin futures contract, you should also take note of the:
- Product Code
- Listed Contracts
- Settlement Method
- Trading Termination
- Position Limits
- Block Minimum
- Circuit or Price Limits
- Vendor Codes and
- Exchange Rulebook.
The value of the Bitcoin futures contracts may vary according to the price of Bitcoin which is determined by the Bitcoin Reference Rate.
This is based on its volume-weighted average price that is gathered from different exchanges and is calculated at a specific time daily.
You can decide how long you should hold on to your futures contracts based on the price fluctuations of Bitcoin or whether you should sell them off to someone else.
When the contract expires, you have the discretion of letting them expire and collect your accrued cash settlement or change them over to new ones.
Depending on the type of contract and the exchange, you may also be allowed to settle your dues physically.
This means that you will receive Bitcoin as final delivery of the product on expiration of your contract.
However, at this point you should remember that there will be some costs involved with the storage and custody of Bitcoin that you receive as the final delivery of the assets when you settle your futures contract physically.
There are a few special considerations to make when you wish to trade Bitcoin futures contracts.
This is an important thing to do because Bitcoin futures trading is still considered to be in its nascent stage in terms of its constituents and market dynamics in spite of the fact that it has grown in volume significantly over the past couple of years. Here they are:
- Bitcoin futures contracts market is pretty similar to crypto spot markets in terms of absence of deep pool of liquidity
- The number of active players in this specific crypto ecosystem is much lower than you will find in other commodities market
- The trading volumes are therefore low
- The price fluctuations can be significantly high especially during volatile periods of crypto price
- It trades at a significant discount or premium and typically follows spot market prices much unlike futures trading with other commodities that offer several indicators to predict the prices in the spot market in advance
- The regulatory setting and measure for Bitcoin futures trading is quite unclear since there are not many crypto exchanges in the US that comes under the supervision of regulatory authorities and therefore do not offer regulated options for futures trading
- You can make some profits through regulatory arbitrages but it will also come with significant amount of risks and
- The price for Bitcoin futures depends mainly on the price of the underlying asset which is highly volatile.
Ideally, the entire process of Bitcoin futures contracts trading is based on a theoretical formula which calculates the future price of the asset.
There are several factors that determine the ideal price in a real-world setting such as the big news events, perceptions of the investors, and more.
The reputation of Bitcoin among the investors as a volatile digital asset that has failed to become the medium for day-to-day transactions, which it was originally designed for, due to its massive bubbles and price swings also is a worthy concern.
All of this points out to one specific thing: Bitcoin futures contracts trading is ideally not an effective protection against the volatility of the underlying asset.
Steps to Follow
There are a few specific steps to follow to trade Bitcoin futures contracts successfully.
This is over and above choosing the right, experienced, and professional broker as mentioned earlier.
First, you will need to know exactly how the futures contracts trade as well as the requirements, especially if you have little or no prior experience of future trading.
Remember, on some platforms the margin and maintenance requirements of the beginners can be exceptionally high.
Next, you should create and follow a strategic and carefully designed trading plan which should be typically created after a careful and proper analysis of the market in which you want to trade as well as the amount of risks you want to take on, the objectives of each trade you wish to make, as well as the acceptable risks.
Follow it by careful fundamental and technical analysis using different indicators to know more about the buy and sell signals and generate them depending on your objectives, trading needs, the order types you wish to use, and the way in which you wish to observe the developments in the market and the price movements.
Money management is also very necessary just as position sizing is, and therefore, you should consider them both very seriously while trading your futures in an extremely volatile Bitcoin market.
You can research to find what others do and choose a plan followed by someone else that suits you and serves your purpose of trading.
Now, it is time to backtest your trading strategy. You can use the Bitcoin Historical Pricing Tool for this.
This tool will allow you to backtest your strategies based on the historical prices of Bitcoin as recorded by the Bitcoin Real Time Index as well as the Bitcoin Reference Rate indicators.
Make sure that you give some time to practice trading on a demo account so that you gain confidence in your trading methods without requiring investing any money.
Start with small trades to save money and have little stress.
And, once you gain confidence and have built up your account via small trades, you can raise your position size. This will allow you to know the issues in your trading plans, if any.
You can open several demo accounts with several brokers and try trading. This will give you confidence in the broker and the service offered as well when you try out different brokers.
Finally, go live by using your live account. Just make sure that you have enough capital to start trading since futures trading can be quite capital intensive as compared to spot currencies trading due to its high margin requirements.
When you are up and running, make sure that you follow a roll strategy considering your activities and the analytics and daily updates on the crypto futures.
This will allow you to track your performance on a regular basis and make changes in your trading plans as and when required.
Trading Micro Bitcoin Futures
Trading with micro Bitcoin futures is also an option offered by a few exchanges that have opened a new avenue for the crypto investors with lots of major possibilities to earn more profits.
These are typically smaller-sized contracts, typically 1/10 of the size of one Bitcoin. These are typically called MBT or Micro Bitcoin futures.
These are cost effective and more efficient in providing a new way to the investors to gain exposure to the Bitcoin ecosystem and fine-tune their trading strategies to enhance the chances of making more profits.
You can scale your exposure precisely with better risk management strategies which will make your trading more granular.
The good thing about these micro Bitcoin futures contracts is that these offer the same kind of benefits as standard and larger Bitcoin futures contracts but at a much lower price of the contract and its size.
Considering the Bitcoin futures and options, the micro futures will be more capital efficient because it will allow you to save on offsets of potential margins adding more competence to your Bitcoin futures contracts.
However, before you start trading with micro Bitcoin futures, gather enough knowledge about it through several webinars and journals that will let you know about the basics behind this new form of Bitcoin futures contracts.
Also, learn more about the crypto derivatives and its evolution so that you can explore them with more confidence.
Apart from that, learn how to scrutinize the different price actions in the market as well as the different ways in which you can use these movements to your advantage.
Subscribing to newsletters to know about the updates and latest events surrounding micro Bitcoin futures is one best way to stay up to date with the market and make more money via Bitcoin futures, micro or otherwise.
It is not easy to trade Bitcoin futures contracts with having proper knowledge about them, over and above the basics. This article hopefully has covered everything that is necessary to make you knowledgeable and confident about it.