The Ultimate Guide To Bitcoin Futures Trading In India

Bitcoin futures are a popular trading instrument that allows investors to speculate on the future price of Bitcoin without actually buying the underlying asset. In this form of trading, investors can bet long (on the price going up) or short (on the price going down). While Bitcoin futures offer the opportunity to magnify potential gains, they also come with higher risks. Bitcoin futures contracts are traded on exchanges such as the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), as well as cryptocurrency exchanges like Binance and ByBit. In India, while Bitcoin is not considered legal tender, investors can purchase Bitcoins through online Bitcoin exchanges or peer-to-peer transfer, although the latter is not advisable due to the risk of losing money.

Understanding Bitcoin futures: what they are and how they work

Bitcoin futures are a type of derivative contract that obligates two parties to exchange an asset or cash equivalent at a predetermined price on a future date. In other words, when investors buy and sell Bitcoin futures contracts, they are speculating about Bitcoin's future price. One party bets that the price will go up, while the other bets that it will fall. The party who is wrong pays the other a cash settlement.

The Chicago Mercantile Exchange (CME) introduced Bitcoin futures contracts in December 2017. These contracts are traded on the Globex electronic trading platform and are settled in cash. Each contract represents 5 Bitcoin and is quoted in US dollars. The contracts expire on the last Friday of each month.

The CME offers monthly Bitcoin futures contracts for six months and additional quarterly contracts for each of the four upcoming quarters. The exchange also offers an additional December contract if only one is listed.

Trading in Bitcoin futures can be done to speculate on short-term swings in the market or to mitigate risk. For example, an investor with a large Bitcoin investment can sell a small number of Bitcoin futures contracts to protect against a crash in the Bitcoin market.

There are benefits to trading Bitcoin futures contracts. They offer regulated exposure to cryptocurrencies, which is significant given the volatile nature of the ecosystem. They also simplify the process of investing in Bitcoin, as investors do not need to create a Bitcoin wallet or put money into custody solutions.

However, it is important to note that Bitcoin is a risky and volatile asset, and trading in Bitcoin futures can be risky. Bitcoin futures traders are also subject to margin calls and exchange fees, which can affect trading profits.

In terms of trading Bitcoin futures in India, it is unclear whether this is possible. While Bitcoin futures are legal in the US and can be traded on authorised cryptocurrency exchanges or the CME, it is not clear if these options are available in India.

The risks of investing in Bitcoin futures

Bitcoin is a highly volatile digital asset, and investing in Bitcoin futures carries significant risks. Here are some key risks to consider before investing in Bitcoin futures:

Speculative and Risky Investment: Bitcoin futures are highly speculative investments due to the volatile nature of Bitcoin's price swings. This volatility can lead to substantial gains or losses, making it a risky venture.

Potential for Fraud and Manipulation: The lack of regulation in the underlying Bitcoin market creates opportunities for fraud and manipulation. Investors must be cautious and carefully assess the risks before investing.

High Price Volatility: Bitcoin's price can fluctuate widely, and this volatility is reflected in Bitcoin futures contracts. The prices of these contracts can vary by delivery months and differ from the underlying commodity's spot price.

Risk of Financial Loss: All investments in funds carry a risk of financial loss, and this risk is heightened with Bitcoin futures contracts due to their high volatility. Investors should carefully consider their risk tolerance and assess the potential for significant losses.

Difference in Investment Outcome: An increase in Bitcoin prices may not lead to a proportional increase in the value of a fund holding Bitcoin futures contracts. This is because funds trading commodity futures contracts might not have direct exposure to the underlying assets.

Expiration and Rollover: Bitcoin futures contracts have expiration dates, after which they must be rolled over into new contracts or allowed to expire. This process can impact portfolio exposure and the overall value of the investment.

Collateral Requirements: Trading Bitcoin futures often requires collateral, known as margin, to execute trades. The volatile nature of Bitcoin usually demands higher margin amounts, impacting the overall investment strategy and potential returns.

Limited Regulatory Oversight: Most exchanges offering Bitcoin futures trading are unregulated. Only a few platforms, like CME, are regulated by entities like the Commodity Futures Trading Commission (CFTC). This lack of regulatory oversight can increase the risks associated with investing in Bitcoin futures.

Complex Nature: Bitcoin futures trading is a complex process that involves understanding derivatives, margin requirements, and price speculation. Investors need to have a comprehensive knowledge of these concepts to make informed decisions.

Impact on Overall Investment Plan: Funds that buy or sell Bitcoin futures may have unique characteristics and heightened risks compared to other investments. It is crucial to consider how this type of investment aligns with your overall investment strategy and risk tolerance.

How to get started with Bitcoin futures trading

Bitcoin futures are bets on the future price of Bitcoin. You can bet that the price will go up (betting long) or that it will go down (betting short).

Bitcoin futures are a contract between two investors who speculate on the future price of Bitcoin. The contract has a specific number of units, pricing, marginal requirements, and settlement methods that you must meet.

For example, if you believe the price of Bitcoin will go up, you can take out a futures contract to buy Bitcoin at a certain price in the future. If the price does go up, the seller has to sell you the Bitcoin at that lower price.

Where can you trade Bitcoin futures?

You can trade Bitcoin futures at brokerages approved for futures and options trading. Examples of popular exchanges for cryptocurrency futures include Binance, Deepcoin, ByBit, OKX, and Bitget.

The main advantage of trading Bitcoin futures is that they offer regulated exposure to cryptocurrencies, which can be volatile. Bitcoin futures are also simpler to invest in than Bitcoin itself, as you don't need to create a Bitcoin wallet or put money into custody solutions.

While leverage can amplify your profits, it can also amplify your losses. The higher the leverage, the smaller the margins for error in price prediction. Additionally, most exchanges offering cryptocurrency futures trading are unregulated, which can increase risk.

To trade Bitcoin futures, you must have an account with a registered futures commission merchant or introducing broker. You will also need to undergo KYC (know your customer) verification, providing documents such as your PAN card, valid address proof, and photographs.

The legal status of Bitcoin in India

The Indian government has expressed interest in understanding how Bitcoin works and is willing to allocate resources to develop frameworks. This is likely due to the growing popularity of Bitcoin in India, particularly after the demonetization drive in November 2016, which saw a surge in the number of Bitcoin users in the country. As of 2017, there were nearly 600,000 Bitcoin users in India, according to Bitcoin company founders. The increase in internet penetration, the success of Bitcoin overseas, and the allure of returns on unconventional investments have all contributed to the growing interest in Bitcoin in India.

While the Indian government is working towards creating regulatory frameworks for Bitcoin, it is important to note that, as of 2021, the government is also exploring the creation of a state-backed digital currency issued by the RBI while banning private cryptocurrencies like Bitcoin. This indicates that the legal status of Bitcoin in India is still subject to change and may face further restrictions in the future.

Tax implications of investing in Bitcoin in India

Bitcoin is a cryptocurrency, a decentralised digital asset and medium of exchange based on blockchain technology. Cryptocurrencies are considered controversial in India because they operate without any intermediary like banks, financial institutions, or central authorities. However, they have gained popularity in recent years, with a significant increase in crypto investors worldwide.

In India, the legality of cryptocurrencies has been ambiguous. In 2018, the Reserve Bank of India (RBI) prohibited crypto-related transactions, but this decision was overturned by the Indian Supreme Court in 2020. The government introduced a bill in 2021 regarding Cryptocurrency and the Regulation of Official Digital Currency, but the final decision is still pending.

Tax Regulations

The Budget 2022 provided some clarity on the taxation of cryptocurrencies in India. Here are the key points:

• Income from the transfer of virtual digital assets, including cryptocurrencies and NFTs, will be taxed at 30%.
• No deductions are allowed when reporting income from the transfer of digital assets, except for the cost of acquisition.
• Losses from digital assets cannot be set off against any other income.
• Gifting or receiving digital assets will attract tax in the hands of the receiver. Losses from one virtual currency cannot be set off against income from another.
• A 1% Tax Deducted at Source (TDS) will be applicable on all sell transactions of Virtual Digital Assets (VDAs) from 1 July 2022.

Taxable Transactions

The following crypto transactions are taxable in India:

• Spending cryptocurrencies to purchase goods or services.
• Exchanging cryptocurrencies for other cryptocurrencies.
• Trading cryptocurrencies using fiat currency such as Indian rupees.
• Receiving cryptocurrency as payment for a service.
• Receiving cryptocurrency as a gift.
• Mining cryptocurrency.
• Drawing a salary in crypto.
• Staking crypto and earning stake benefits.

Calculating Crypto Tax

To calculate your crypto tax liability in India, you need to determine your profits from crypto transactions. Here's the formula:

• Gains from crypto = Sale price - Purchase price (or cost of acquisition).
• Crypto tax = 30% of Gains from crypto.

It's important to note that the entire income of the investor is subject to the same 30% tax rate, regardless of whether the gains are short-term or long-term. Additionally, a 1% TDS will be applicable on the sale of crypto assets exceeding a certain threshold.

Disclosure Requirements

The Ministry of Corporate Affairs (MCA) has mandated the disclosure of gains and losses in virtual currencies in the notes to the accounts of company financial statements. This applies to companies, but not to individual taxpayers. However, all individuals must report and pay taxes on their cryptocurrency gains.

Other Considerations

• Crypto gifts received from relatives are generally tax-exempt. However, gifts from non-relatives above a certain value may be taxable.
• Crypto mining income is subject to a flat 30% tax. The cost of acquisition for mining is considered zero, and no expenses such as electricity or infrastructure costs can be included.
• If crypto-related transactions are classified as business income, the implications of the Goods and Services Tax (GST) law may also need to be considered.

Frequently asked questions