Bitcoin futures have been a relatively recent addition to traders’ financial toolset, and as the market develops, they are increasingly becoming regulated by exchanges. From an investment perspective, futures are a way to make speculative profits from cryptocurrencies without even owning them. You will learn about what futures are, how they work and how to use them to trade Bitcoins, as well as whether the average private investor can use this tool in this article.
What are futures
Futures is a contract to buy or sell a cryptocurrency at a specific time and price. When a futures expires at a certain time, its buyer agrees to honor the contract, that is, to buy or sell an asset in a certain quantity at a predetermined value, regardless of the market value of the asset at the time of purchase/sale.
The first futures contracts appeared on the commodities market and were used mainly for deferred payment for commodities. Such contracts were suitable for each of the parties as they allowed avoiding fluctuations of the price which could cause difficulties in the future calculations. Many people had to deal with futures contracts in everyday life by booking certain goods or services in advance. For example, while booking hotels or airline tickets, etc.
Each futures contract has a number of specific terms and conditions. These include: the name of the futures contract, the number of assets to be bought/sold, the purchase price of the asset at the time the contract is executed, and the type of contract.
Futures contracts come in two different types:
- A deliverable futures is an agreement for a specific asset to be transferred at the end of the futures term. The asset can be any commodity or money.
- Non-deliverable type of contract involves entering into a contract without the transfer of the asset. In other words, in these futures contracts, the parties only make calculations on the variation of the price specified in the contract and the actual price of the object of the transaction on the date of completion of the futures contract.
Types of margin
It is important for futures trading to understand the difference in types of margin:
- Initial margin is the required guarantee fee that the exchange charges when a position is opened. It is refunded after the contract is closed. On average, the amount of margin depends on the volatility.
- Maintenance margin is the necessary amount, which must be in the account to prevent the forced closing of a position. The size of the margin requirements depends on the exchange, which exhibits its own conditions for trading. Therefore, the index may be different on different exchanges.
- Variation margin is the amount of funds, which is a loss or profit from the closed contracts. The value is calculated by the results of the trading session.
Bitcoin futures
Bitcoin futures are the most popular type of cryptocurrency contracts. Today, they can be found on almost all major exchanges. Bitcoin futures were first introduced in 2015 and quickly gained popularity among private traders.
A futures contract is a transaction to buy or sell bitcoin. When it is opened, one party agrees to repurchase the asset at a certain price. For example: the current value of BTC is $19,546. By opening a trade, one agrees to redeem the asset as 1 BTC at a certain point in time at the same price.
The main difference between the futures market and the spot market is that the deals are made after a certain period of time. Therefore, the exchange rate trend for a future period can be determined based on the volume and number of contracts.
Expiration dates
Bitcoin futures are forward-looking contracts, which means that they have a limited duration. Every contract has an expiration date, after which the contract is considered invalid. Futures are usually divided into serial and quarterly futures.
Serial futures are intermediate contracts whose expiration date falls on any other month of the year, except for the last quarterly contracts. The last trading day for these futures usually falls on the third Friday of the month. The contract expiration date is specified in the futures contract data sheet.
Quarterly futures are fixed contracts for buying/selling items that are executed in the last month of each season (the period from the 15th to the 20th day of the last quarterly month).
Peculiarities of trading
First of all, it is necessary to determine where exactly futures trading will take place. One option is cryptocurrency exchanges, but not all exchanges are suitable for this purpose. For example, crypto futures is a futures exchange that offers complete security and low commissions.
Beyond that, an option is to use the services of a professional broker who will execute the trade on your behalf and post a deposit to the clearing house.
Opening an order
The algorithm for opening an order on an exchange is as follows:
- First, you must transfer money from the exchange to a futures wallet. Then you enter the desired amount and press the confirmation button. Under the button, the account balance of the futures wallet is displayed.
- Before you open an order, you need to determine the leverage.
- Further it is necessary to choose a type of margin.
- Then you need to select the order type.
- Set a stop limit ( to ensure that the price deviates from the forecast).
- To open an order, you need to enter the price and amount of the cryptocurrency to be purchased, which will allow you to buy funds for the portfolio, taking into account the leverage.
- Then click “Buy” and click again after the notification. Once this is done, your offer will be shown in the list of orders.
Optimal deposit level
What is very important is to know the characteristics of the contracts that the trader wishes to trade. The balance should contain the funds, the possible loss of which will not be critical for the trader. Only a small part of total capital should be risked for each deal. You should limit the possible losses when opening an order by expressing them in the currency of the deposit or in points.
Trading Strategy
Newbies often make the huge mistake of not developing a trading plan before they start trading. A trading plan should determine your goals, acceptable risk, ongoing objectives, and overall strategy. The plan should be very detailed and include everything you will do hour by hour while trading. Only then will you be able to control your results and even formulate a clear exit strategy for unprofitable trades.
Estimating the risk
Trading in the cryptocurrency futures market is divided into two tasks: making profits and hedging risks. The usual speculative methods based on price dynamics and competent forecasts are used to make profits. Hedging is a type of risk insurance.
Let’s say you need to make a certain deal of 20 Bitcoins in the future, but you fear that the price will fall, you buy a futures contract at a certain price. This way, at the expiration of the contract, the buyer is guaranteed to receive the necessary amount, regardless of price fluctuations. This instrument provides a guaranteed income, but it is not suitable for speculative operations.
Influence of futures on the crypto market
According to many experts, the appearance of Bitcoin futures in today’s market will contribute to the mass acceptance and spread of cryptocurrencies, as traditional investors will be less hesitant to them. In turn, this may help to increase demand and positively affect the price and market capitalization in the long run. However, there are concerns that Bitcoin futures can be used for aggressive trading. Critics, including representatives of the futures industry, argue that these contracts are premature and, in the worst case, create systemic risk given the volatility of the digital currency market.
Futures contracts are expected to bring more liquidity to the market, which in turn will make cryptocurrency transactions easier and more profitable. Their use is mainly to smooth out price fluctuations of the underlying assets. Whatever the case may be, the integration of the cryptocurrency market into the mainstream market can contribute to the mass adoption of new assets and, accordingly, long-term growth.
Summary
Bitcoin futures have gained considerable popularity not only among traders, but also among ordinary cryptocurrency enthusiasts who are confident that Bitcoin will be worth much more in the future. With Bitcoin futures, you set the price at which you want to sell or buy a certain amount of digital coins at a certain time in the future. These contracts are extremely useful for various hedging methods and can be used by various exchanges that hold large amounts of cryptocurrency or cash.
Before traders start trading Bitcoin futures, exchanges warn about the increased risk of trading, and those are absolutely justified. While on the spot market, a trader can endure even a very deep drop, in the case of futures, they will have to close the position at a loss.