The Ultimate Guide To Investing Bitcoin Futures

Bitcoin futures are a type of derivative contract that allows investors to speculate on the future price of Bitcoin. They are traded on exchanges such as the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE). Bitcoin futures contracts are typically traded with leverage, allowing investors to amplify their profits. However, this also comes with the risk of losing money quickly. When investing in Bitcoin futures, it is important to understand the concept of leverage and the risks involved. Additionally, Bitcoin futures ETFs provide a way for investors to gain exposure to Bitcoin without directly owning the cryptocurrency. These ETFs trade on traditional exchanges and are regulated, offering a familiar investment type to investors.

Bitcoin futures contracts

There are two positions you can take on a futures contract: long or short. If you take a long position, you agree to buy an asset in the future at a specific price when the contract expires. When you take a short position, you agree to sell an asset at a set price when the contract expires. For example, if you believe the price of Bitcoin will increase, you can take a long position and profit from the price difference when the contract expires. On the other hand, if you think the price will decrease, you can take a short position and again profit from the price difference.

The benefits of trading Bitcoin futures contracts include the ability to gain exposure to Bitcoin without actually owning it, which simplifies the investment process. It also offers regulated exposure to Bitcoin, which is particularly significant given the volatile nature of the cryptocurrency market. Additionally, Bitcoin futures contracts are safer than owning the cryptocurrency directly, as they have positions and price limits that enable investors to curtail their risk exposure.

It is important to note that trading Bitcoin futures contracts carries risks. Bitcoin is known for its volatile price swings, which can result in significant losses if not managed properly. Additionally, most exchanges where Bitcoin futures are traded are unregulated, which can introduce additional risks. Therefore, it is crucial to understand the risks involved and conduct thorough research before investing in Bitcoin futures contracts.

Regulated vs. unregulated exchanges

When considering where to invest in Bitcoin futures, one key distinction to be aware of is the difference between regulated and unregulated exchanges.

Regulated exchanges, such as the Chicago Mercantile Exchange (CME), are overseen by government agencies or regulatory bodies such as the Commodity Futures Trading Commission (CFTC) in the case of CME. These exchanges have set rules and guidelines that they must follow, including maximum leverage amounts. For example, CME's Bitcoin futures contracts are regulated by the CFTC, offering institutional investors confidence and recourse. This regulation also simplifies the process of investing in Bitcoin, as investors do not need to create a Bitcoin wallet or utilise custody solutions for storage and security.

On the other hand, unregulated exchanges, like Binance, have more freedom to allow excessive risk-taking. For instance, when Binance launched futures trading in 2019, it offered leverage of up to 125 times the trading amount, which was later revised to 20 times in July 2021. While higher leverage can lead to higher profits, it also significantly increases the risk of losing large amounts of money due to the volatile nature of Bitcoin.

Unregulated exchanges also tend to have different margin requirements. For instance, CME has a base margin requirement, but brokerages offering CME Bitcoin futures trading, like TD Ameritrade, can set additional margin rates.

It is worth noting that most exchanges offering cryptocurrency futures trading are unregulated. Therefore, investors should be cautious and consider the risks associated with trading on these platforms.

In summary, regulated exchanges provide a more stable and secure environment for investors, while unregulated exchanges offer higher risk-taking opportunities and less oversight.

Crypto futures options

When trading crypto futures options, investors can take a long position, betting that the price of the underlying cryptocurrency will increase, or a short position, betting that the price will decrease. Leverage can also be used to amplify profits, with some exchanges offering up to 100x leverage. However, it is important to note that higher leverage also increases the risk of losing significant amounts of money if the market moves against the investor's position.

One of the benefits of trading crypto futures options is that they offer regulated exposure to cryptocurrencies, which can provide a level of confidence and recourse for institutional investors. Additionally, crypto futures options can be simpler than directly investing in cryptocurrencies, as there is no need to set up a cryptocurrency wallet or custody solution. The price volatility of cryptocurrencies also makes them a risky asset for options trading, and the high implied volatility of options contracts can magnify trader losses.

Some of the popular exchanges for trading crypto futures options include Deribit, which has around 90% market share in BTC and ETH options, and CME Group, which offers Bitcoin and Ether futures and options.

Pros and cons of investing in futures ETFs

A bitcoin futures exchange-traded fund (ETF) issues publicly traded securities that offer exposure to the price movements of bitcoin futures contracts. An investment company creates a subsidiary, or a commodity pool, that trades bitcoin futures contracts, usually to mimic the spot price of bitcoin.

Pros

• No management fees – Unlike ETFs, there are no annual management fees for futures contracts.
• 24-hour trading – Futures trade almost 24 hours a day, six days a week, while ETFs cannot be traded 24 hours a day.
• Liquidity – Futures offer more liquidity than ETFs, meaning they can be bought and sold more quickly and easily.
• Tax benefits – According to IRS Section 1256, a profitable short-term futures trade will pay less in taxes than an ETF.
• Control – Futures offer investors more control over what they are investing in.
• Volume – Futures contracts have a much higher trading volume than ETFs, making them more attractive to investors.

Cons

• Risk – Bitcoin and bitcoin futures can be highly volatile, and leverage from futures contracts can amplify both gains and losses.
• Roll premiums – As futures contracts don't track spot prices exactly, returns may never be as high as, or in sync with, spot market prices.
• Management fees and expenses – These costs can affect the overall performance of an ETF investment.
• Tracking error – While futures closely track the underlying asset, some ETFs have major tracking errors, creating large variances in how they track the underlying stock.

How to invest in Bitcoin futures

Bitcoin futures are contracts between two investors who bet on the future price of Bitcoin, allowing them to gain exposure to Bitcoin without actually purchasing it. These contracts are traded on the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE), as well as on cryptocurrency exchanges.

Where to Trade Bitcoin Futures

You can trade Bitcoin futures at brokerages approved for futures and options trading. Some popular exchanges for cryptocurrency futures include:

• Binance
• Deepcoin
• ByBit
• OKX
• Bitget

How to Trade Bitcoin Futures

To trade Bitcoin futures, you will need to set up an account with a registered futures commission merchant or introducing broker. You will also need approval from the trading service provider to start futures trading, which will depend on factors such as funding requirements and your experience with derivatives trading.

Understanding Leverage

Leverage plays an important role in Bitcoin futures trading. It allows investors to put down a smaller amount of money and gain access to a larger amount, amplifying their potential profits. For example, with 100x leverage, a 2% price increase can yield a 200% profit. However, higher leverage also means smaller margins for error, and the risk of losing money quickly.

Risks and Considerations

Bitcoin is known for its volatile price swings, which makes investing in Bitcoin futures risky. Cryptocurrency futures are also largely unregulated, with only a few select trading venues, such as the CME, being regulated by the Commodity Futures Trading Commission (CFTC).

Additionally, Bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. As the SEC warned in 2021, "investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment."

Frequently asked questions