Averaging more than $5 Billion in daily trading volume, futures are one of the most liquid instruments to trade Bitcoin.
Popular Bitcoin futures exchanges like Bitmex, Deribit and FTX enable its users to long or short BTC with up to 100x leverage.
While it’s important to note that trading Bitcoin futures carry considerable risk, they also come with multiple benefits.
This guide aims to explain how to trade Bitcoin futures, show some benefits of this trading instrument, and outline the best Bitcoin futures exchanges.
What Are Bitcoin Futures
In a general sense, futures are a type of derivative financial contract that allows investors to easily speculate on the directional movement on an underlying asset’s value, such as a stock or commodity.
Futures contracts contain an agreement to buy or sell a specific number of units of an underlying asset at a specific price and on a specific date—known as the expiration date. Counterparties are obligated to fulfill the terms of the contract upon expiration.
Futures are very similar to options in several ways but differ mainly by the fact that futures obligate counterparties to fulfill the contract terms at expiration, whereas options give the contract holder the right (but not the obligation) to execute the terms of the contract at expiration.
Bitcoin Futures Are Just Like Any Other
As previously mentioned, futures allow investors to speculate on an underlying asset. In the case of Bitcoin futures, this underlying asset is the digital asset known as Bitcoin (BTC). Each Bitcoin futures contract specifies the number of bitcoin that needs to be traded at a specific date, execution of which will be directly handled by the exchange platform.
The first Bitcoin futures product was launched back in December 2017 by CBOE Futures Exchange, allowing investors to speculate on whether the price of Bitcoin will climb or fall by expiration. Nowadays, Bitcoin futures can be traded on a variety of regulated exchange platforms, in addition to a few unregulated ones.
The great majority of Bitcoin futures are settled in cash, though an increasing number of platforms are beginning to offer physically-settled Bitcoin futures, which means they pay out BTC upon settlement.
An On-Ramp for Institutions
The launch of Bitcoin futures is widely regarded as one of the most significant milestones in Bitcoin’s history. The milestone was so significant that some say it was the single event that caused Bitcoin to reach its all-time highest value of over $20,000—just a week after CBOE launched the first Bitcoin futures, and the same day Chicago Mercantile Exchange (CME) launched its 5 BTC cash-settled futures contracts.
This can likely be attributed to the fact that at least initially, all Bitcoin futures were regulated by the Commodity Futures Trading Commission (CFTC), making them much more attractive to institutional investors and hedge funds. Similarly, Bitcoin futures also act to help to reduce the price volatility of what can otherwise be considered a volatile asset through more efficient price discovery.
Concerns and Criticism
Although Bitcoin futures are widely acknowledged as a boon for the Bitcoin markets, they have often been met with criticism. For one, some argue that Bitcoin futures actually negatively influence BTC markets through price manipulation. In one study, researchers found that the Bitcoin price tends to fall by around 2% just prior to CME futures contracts being settled.
Likewise, because many Bitcoin futures are actually traded in and settled in cash, it can be argued that Bitcoin futures actually reduce the liquidity of the underlying Bitcoin market. This might not be the case for long, however, since physically-delivered Bitcoin futures are now available from Bakkt.
Where To Trade Bitcoin Futures?
|Futures Exchange||Fees||Key Feature||Trade|
|BitMEX||0.075% taker fee||Best liquidity|
|Deribit||0.075% taker fee||Easy to use|
|FTX||0.07% taker fee||Advanced products|
How To Trade Bitcoin Futures
With any Bitcoin futures contract, there is a buyer that agrees to sell BTC at a certain price on a certain date, and a buyer that agrees to buy it at that price on that date.
Because of this, if a trader believes Bitcoin will increase in value by expiration, they will want to be the buyer in a futures contract that specifies a price point at or below Bitcoin’s current value.
If this buyer entered a 1 BTC futures contract at $8,000, then Bitcoin increases to $9,000 at maturity, they will have profited by $1,000, whereas the counterparty would lose this amount.
On the flip side, traders that want to short Bitcoin would want to be the seller on a contract that settles at higher than the current price of BTC.
Fortunately, there is no shortage of Bitcoin futures trading platforms, so you’ll have plenty of choices when selecting the one that works best for you. Four of the most well-reputed options are outlined below.
Bitcoin Futures on BitMEX
BitMEX is one of the most popular Bitcoin futures platforms in operation and today and has become somewhat of a tour-de-force in the cryptocurrency space.
- Easily accessible thanks to its low minimum contract size
- Futures available for several digital assets, including Bitcoin
- Massive insurance fund
- BitMEX is an unregulated Bitcoin futures trading platform
- Complicated trading interface
- Lack of fiat deposit/withdrawal options
Part of the reason BitMEX is so popular is due to its accessibility. Unlike most other Bitcoin futures trading platforms, BitMEX does not require users to complete KYC to begin trading.
Similarly, BitMEX has a minimum contract size of just $1, ensuring even smaller traders can trade Bitcoin futures.
In total, BitMEX offers two different Bitcoin futures, which are quoted in USD, but settled in Bitcoin (XBT). The platform also offers futures for Cardano (ADA), Bitcoin Cash (BCH), EOS, Ethereum (ETH) and several other digital assets.
Despite being unregulated, BitMEX operates easily one of the largest insurance funds of any Bitcoin futures trading platform—whether regulated or not.
As it stands, the fund currently contains well over 31,600 BTC worth some $250 million, which will be used to protect traders against auto-deleveraging and slippage.
Getting started trading Bitcoin futures on BitMEX is a relatively painless process. To begin, create an account on the platform and click the verification link you will be emailed.
Once verified and logged in, you will need to load your account with Bitcoin through the deposit section of the website found in the ‘Account & Security’ section.
Following this, you will need to open the trading interface by clicking the ‘Trade’ option in the top menu bar.
Here, you will be able to select the desired Bitcoin Futures contract from the ‘Bitcoin’ tab, and will be able to place your order on the left, selecting the leverage, the number of contracts, and whether to buy or sell the market.
Bitcoin Futures on Deribit
Launched back in 2016, Deribit was one of the first exchanges to offer Bitcoin futures and still remains one of the most popular Bitcoin futures exchanges today.
- No KYC requirements
- Simple to use trading tools and user interface
- Up to 100x leverage available
- Only Bitcoin futures available
- Minimum order size is 10 contracts
- Deribit is not regulated by the CFTC
Unlike BitMEX which offers futures for several different cryptocurrencies, Deribit has a sole focus on Bitcoin futures. As it stands, Deribit offers two Bitcoin futures contracts—one short term and one medium-term expiration.
Besides offering Bitcoin futures with two different expirations, Deribit also offers a Bitcoin perpetual swap product, which has no defined expiration date and differs from traditional Bitcoin futures in a few other ways.
Deribit is known for its impressive liquidity, making entering and exiting positions a painless process. Like all good Bitcoin futures trading platforms, Deribit also maintains an insurance fund that should cover the losses of any bankrupt traders.
This insurance fund currently sits at almost 300 BTC (over $2 million), which is more than sufficient thanks to Deribit’s real-time incremental liquidation system—which drastically reduces the number of bankruptcies.
As far as derivatives trading platforms go, Deribit is also one of the simpler to use, making it ideal for those first getting to grips with trading Bitcoin futures.
It also doesn’t require KYC verification—a rarity among Bitcoin futures exchanges—though this might change in 2020 following new Dutch regulations.
To begin buying and selling Bitcoin futures on Deribit, you will first need to create an account and verify it. Once verified, login, click your username on the top right and select the deposit option.
Here you will find your deposit address, use this to load your account with the BTC you will use for trading. Once loaded, you will be able to select the futures product you want to trade under the ‘BTC-USD’ heading on the left.
Once selected, the trading panel will be loaded at the bottom of the page, where you will be able to set the number of contracts to buy and choose whether to buy or sell.
Bitcoin Futures for Institutions
Although BitMEX and Deribit are designed for both casual and professional traders, there are also a number of Bitcoin Futures trading platforms that are designed with institutional customers in mind.
Although these aren’t for regular traders right now, two of the main players: Bakkt and CME have expressed an interest in opening services to non-accredited investors in the future. Nonetheless, as two prominent platforms that are directly involved in shaping the Bitcoin market, it is important to understand what Bakkt and CME are and what they offer.
Intercontinental Exchange’s Bakkt platform is the newest entry to the Bitcoin futures trading arena. Despite being founded in 2018, a number of setbacks caused the launch of Bakkt’s physically-delivered Bitcoin futures to be delayed several times, and eventually went live in September 2019.
Unlike other Bitcoin futures exchanges, Bakkt’s Bitcoin futures are physically-settled, which means that BTC will change hands between the buyer and seller in the contract at expiration. This is in contrast to most other Bitcoin futures exchanges, which settle Bitcoin futures in cash.
Currently, Bakkt is only accessible by institutional investors and offers a total of two Bitcoin futures products: Bakkt BTC (USD) Daily Future and Bakkt BTC (USD) Monthly Future. These have a contract size of 1 BTC and a minimum trade size of 10 contracts (10 BTC), with clearing provided by ICE Clear US (ICUS).
As a CFTC regulated platform, Bakkt adheres to the strictest security procedures and features a $125 million insurance plan for BTC held in its custody. Bakkt only allows trading during certain hours, these are 8:00 p.m. EPT to 6:00 p.m. EPT, Sunday to Friday.
According to the Bakkt FAQ, the platform is only accessible to trading participants with a type of registered futures broker known as a futures commission merchant (FCM) who is a clearing member of ICUS.
The Chicago Mercantile Exchange, or CME, is a large derivatives platform operating out of Chicago. CME is well-known as the second regulated platform to launch regulated Bitcoin futures, back in December 2017.
CME is one of the largest Bitcoin futures trading platforms in terms of daily trade volume—at over $300 million in futures traded daily. Unlike Bakkt, Bitcoin Futures on CME are settled in cash, which means no BTC ever changes hands on the platform.
CME currently offers only a single Bitcoin futures product, the ‘Bitcoin CME Futures contract’. CME’s Bitcoin futures have a contract size of 5 BTC and are settled quarterly, with a minimum trade size of 5 contracts. CME plans to introduce options for its Bitcoin futures in the first quarter of 2020, adding additional flexibility in terms of managing risk.
Like Bakkt, CME only offers futures trading during certain hours, these are 5:00 p.m CST to 4:00 p.m CST, Sunday to Friday. Regular traders are also unable to directly trade on CME, instead, traders will need to open an account with a futures commission merchant who will be able to manage their portfolio.
Why use Bitcoin Futures
As a derivative financial instrument, Bitcoin futures enable investors and traders to execute much more advanced, and potentially more effective investment strategies than simple spot trading. Learning how to trade Bitcoin futures is a relatively simple process, but truly mastering them will take practice.
They also enable several potentially profitable investment opportunities that are simply not possible with other Bitcoin derivatives, making them an ideal element in any well-rounded investment portfolio.
Hedge price risk
Considered somewhat of an advanced investing strategy, hedging is the process of protecting an investment against a decline in value by creating another investment that will profit in a declining market.
For example, if an investor holds 100 BTC and wants to protect themselves against losses during a bear market, they could short 100 BTC with Bitcoin futures, such that any losses on their spot position will be neutralized by profits made on the futures. Since many Bitcoin futures exchanges offer up to 100x leverage, the investor would be able to essentially eliminate risk using only 1 BTC in collateral.
This strategy can be employed by anybody looking to minimize their exposure to price risk, protecting their long positions against any unexpected downturns. This can include Bitcoin miners, businesses that accept Bitcoin payments, long-term holders and
Directional price speculation
Bitcoin is widely considered to be one of the best speculative assets since the potential for upside profits is high, while its volatility makes shorting and day-trading potentially hugely profitable for experienced traders.
Likewise, Bitcoin futures allow even more people to benefit from the high risk, but high reward Bitcoin markets. Giving traders an easy way to go short or long on the market, and multiply their exposure to the market using leverage—something not possible with simple spot trading.
In addition, rather than continually tracking the market every day, Bitcoin futures allow investors to speculate on the price of Bitcoin over longer time-scales, making them suitable for traders with little time on their hands.
Bitcoin arbitrage is the process of buying or selling Bitcoin on two different markets at the same time to take advantage of price discrepancies between these two markets. Buy buying on one platform where the price is lower, and selling on another platform where the price is higher, it is possible to lock the price difference as profit with next to no risk.
Since Bitcoin futures allow traders to short the market, these add another way to perform Bitcoin arbitrage.
For instance, if a spot exchange is trading Bitcoin at below its fair value, while a Bitcoin futures exchange offers a future above fair value, the arbitrageur can buy bitcoin on the spot exchange, and short Bitcoin on the futures exchange to lock in the price.
The profit is realized when the futures contract expires.
Similarly, it is also possible to perform arbitrage across two Bitcoin futures platforms if a number of conditions are met, however, these opportunities are far less frequent.
Risks of Bitcoin futures
Although Bitcoin futures can allow traders to generate an impressive profit, there are some caveats and risks that need to be considered first. Fortunately, most of these risks can be managed with proper due diligence and adequate caution.
The most important risks to consider are outlined below.
Complete loss of capital
Despite being one of the easier types of Bitcoin derivatives to grasp, Bitcoin futures are still a relatively complicated financial instrument that is best traded by brokers and highly experienced traders.
Like most investments, it is quite possible to lose money when trading Bitcoin futures. In fact, inexperienced traders are more likely than not to lose money when trading Bitcoin futures, and as such, should be particularly wary when entering these markets.
Traders just starting out learning how to trade Bitcoin futures should test the waters with small amounts, until they get the hang of things.
As a particularly volatile asset, Bitcoin is known to frequently experience sudden, often dramatic changes in value. This can quickly lead to significant, or even total losses if the market moves against the trader’s position.
The risk of losing capital is further multiplied when using leverage. For example, if a trader goes long on the market with 100x leverage, a price dip of just 1% will be sufficient to completely wipe out their collateral and trigger liquidation. Because of this, traders should use leverage sparingly, and only trade with money they are willing to lose.
Although the great majority of Bitcoin futures exchanges are regulated platforms, some are either loosely regulated, while others are completed unregulated. As can be expected, these unregulated platforms don’t necessarily match up to the quality and security of regulated Bitcoin futures exchanges.
Regulated Bitcoin futures exchanges need to meet a list of criteria set out by the CFTC, ensuring things like equal opportunity, protection against manipulation and fraud prevention. Unregulated platforms do not necessarily adhere to these rules, and as such, can be more prone to manipulation and fraud.
Likewise, since unregulated Bitcoin futures exchanges don’t operate as clearinghouses and they often don’t have guarantees in case the future settlement system fails, there is a slim chance of losing money due to platform failure.
Unregulated exchanges could also be seen as illegal if they are operating within a jurisdiction where a license is required, because of this, it could be argued that it is just a matter of time before they start being shut down—potentially leaving investor money in limbo.
Because of this, it is important to keep your balance to a minimum on these platforms, keeping only what you use for trading in your account wallet.
Pascal Thellmann is an investor and marketer focused on the intersection of cryptocurrency and the legacy financial system. He co-founded Bounty0x, which at the time was the largest crypto freelance platform. Now Pascal dedicates his time to CoinDiligent and trading. You can get in touch with Pascal Thellmann on LinkedIn.