Sunday, July 3, 2022

What Is Crypto Futures Trading

How Does Futures Trading Work

Learn Crypto Trading: Futures Trading

If you had watched the process of cryptocurrency futures trading on a crypto exchange platform like Bybit, you wouldnt tell the difference from regular trading. Thats mainly because traders do precisely the same thing in both cases open long and short positions and implement proper risk management techniques.

However, futures contracts are very different from spot trading because they dont operate with the underlying assets but only with their price action. Without the actual asset, futures are way more fluid and easier to handle. Also, they enable with high leverage.

What Is A Derivative

Derivatives are financial contracts set between multiple parties that derive their value from an underlying asset or benchmark.

The contract is signed between two or more parties that want to buy or sell a particular asset for a specific price in the future. The value of the contract is therefore determined by fluctuations in the price of the benchmark it derives its value from. Often these underlying assets used in derivatives are currencies , commodities, bonds, stocks, market indexes and interest rates.

Derivatives are often used when investors want to protect themselves from price fluctuations. With this in mind, you can see how signing a contract to buy an asset for a fixed price in future helps mitigate risks.

Another way some investors make use of derivative trading is speculation, whereby traders are trying to predict how the assets price might change over time.

Crypto Futures Are Extremely Volatile Derivatives

Trading futures isnt for everyone. Theyre volatile and complex and require a deep understanding of the underlying asset and current economic conditions. When you add in cryptocurrencies, which are volatile assets even before you use leverage, your risk multiplies.

Crypto futures trading requires a certain mindset for success. You need a high risk tolerance, a platform where you can successfully execute your trading plan and plenty of caffeine since these assets trade 24 hours per day, 7 days per week. Just be sure to completely understand how these derivatives work before purchasing them.

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What Is Futures Trading

Global financial markets are among some of the most lucrative industries on the planet. While some disagree, its hard to ignore how the financial markets thrive with instruments to raise capital, secure supplies at low prices and make credit out of thin air. Derivatives trading is among such fascinating concepts. Unlike spot trading, derivatives trading is more flexible and manageable since it derives its value from a primary underlying asset. And crypto derivatives markets often make use of leverage.

Generally, derivatives trading refers to a mechanism under which traders sign a contract to trade an underlying asset at a specific date and price. The primary intent behind derivatives trading is to speculate on the underlying assets future price, allowing traders to book profits based on the price difference. And it is applicable across various assets, including commodities, currencies, and cryptocurrencies. While the most common form of cryptocurrency derivatives includes the Bitcoin futures.

As the primary focus of this post is to introduce how traders can use derivatives trading in cryptocurrencies, heres what were going to discuss:

Crypto Futures For Beginners: What Are Crypto Futures And How Can You Get Started

What Is Crypto Derivatives Trading &  How Does It Work?

Crypto futures have conceivably been one of the most exciting instruments for trading since the arrival of digital assets. By allowing speculative exposure, theyve supported an extra-industry interest in the cryptocurrency space, extending its mainstream appeal and propagating adoption. This ubiquitous allure has charmed even the most prominent finance monoliths, including the likes of the Intercontinental Exchange . Last year ICE announced its own iteration of crypto futures with Bakkt prompting yet more industry involvement.

But what are crypto futures, and how can beginners learn the trading basics?

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How To Trade Bitcoin Futures

Trading in crypto futures is very different from trading in the spot market. You need to have a trading plan, risk management strategy, and understanding of the functioning of the derivatives market.

In crypto futures, there is no involvement of the crypto assets as all contracts are cash-settled. Therefore, you arent required to have the cryptocurrencies in the exchange wallet when trading in their futures. You need to have enough balance in your exchange account to initiate a position and cover the initial and maintenance margin.

Maintenance margin is the minimum amount of funds you need to keep in the account to cover your losses.

Now, lets have a look, how to trade bitcoin futures.

  • Step 1: Learn how to trade in bitcoin futures contracts

There are several types of futures products you can trade in the crypto market, like perpetual futures , traditional futures , inverse perpetual contracts, etc.

You need to understand the products in detail and find out the most suitable one for yourself.

Also, you need to know the factors that affect the price movement of crypto futures, like- how closely the futures price tracks the underlying asset, initial margin requirement, liquidity of the specific contract, and how traders and market makers are positioned in the market.

  • Step 2: Building a trading strategy

For trading in bitcoin futures, you need to have a sound trading strategy based on your trading goals, risk profile, and market understanding.

  • Step 4: Test your trading plan.

Ways To Place Spot Orders

Limit: A Limit order is an order to buy or sell an asset at a price specified by you. Limit orders can be appropriate when you think you can buy at a lower price or sell at a higher price than the current price.

  • If the order is matched at the price range, you place the order. Limit orders are executed.
  • If the order is not matched at the price range, you place the order. Limit orders will not occur.

A Market order is an order to buy or sell an asset at the current market price. A Market order usually guarantees execution, but it does not guarantee a specific price. Market orders are often appropriate when you want immediate execution.

Stop limit: A stop-limit order is a limit order that has a stop price. When the stop price is reached, it triggers the limit order. The limit price is the specific price of the limit order the stop price triggers. Once your stop price has been reached, the limit order is immediately placed on the order book.

  • Stop Price: When the price reaches a stop price, a Stop Limit order will be executed to buy or sell the asset at a certain limit price or better.
  • Limit Price: The selected price at which the Stop Limit order is executed.

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Futures With Physical Delivery

Another type of cryptocurrency futures that also have expiry dates are futures with physical delivery. They were first introduced by Bakkt, an entity backed by Intercontinental Exchange , the parent New York Stock Exchange . The only difference from the regular futures described above is that cryptocurrency is actually delivered during the settlement process.

Bakkt now offers only Bitcoin futures with physical delivery, meaning that it transfers Bitcoin at the expiration date to those who bought futures on the cryptocurrency. As a cash-settled futures contract, this approach aims to contribute to the Bitcoin circulation.

What Is Crypto Futures Trading

How to Trade Crypto Futures (Step-by-Step Crypto Futures Trading Guide)

Crypto futures trading differs from spot trading in many ways as it doesnt require participants to hold any assets to participate. Instead, traders look to buy or sell derivatives contracts, which represent the value of a given crypto at a specific date in the future.

Essentially, futures trading allows investors to speculate on the future value of a cryptocurrency. Traders can go long to wage on a price advance, or go short to anticipate a price drop.

One of the most important benefits of futures trading is the use of leverage.

Leverage allows for better capital efficiency as traders do not have to lock up entire amounts of capital. It increases both potential returns and risks, which is why traders must always exercise caution.

A leverage of 2x or 5x would be considered appropiate for those who are new to futures trading. Especially, for traders who want to use crypto derivatives as a defensive hedge for their portfolios. If an asset were to perform poorly, or opposite what is speculated, a futures trade hedged against this outcome with a certain amount of leverage can compensate for the loss.

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The Pros And Cons Of Crypto Futures

There are a few pros and cons of crypto futures trading, and some people will find the positives outweigh the negatives, whereas others will be a bit more risk-averse and choose to avoid crypto futures.


If you bet the right way, the futures market can be extremely lucrative, and many people have made a fortune overnight by getting the market right on a futures contract.

The majority of retail investors lose heavily on crypto futures contracts.

Once you wrap your head around it all and know the market, it becomes easier to predict things and make better trading choices.

Hedging is harder to do in the crypto world because other cryptos move prices according to Bitcoin. Bitcoin is the primary trading pair for most digital coins.

There are many platforms offering crypto futures, with many providing coaching, and some even giving incentives for joining up.

In crypto crashes, even hedging wont prevent you from losing all of your money.

You dont have to actually hold crypto to trade Bitcoin futures.

Crypto Futures Exchange Platforms

With the rising popularity of crypto futures, regulated marketplaces have emerged to provide users access to Bitcoin and cryptocurrency futures. Moreover, it is necessary to find a reliable third-party to facilitate trades in the derivatives market.

Some of the considerations while selecting an exchange platform for crypto derivatives trading include:

  • Regulated – As a futures agreement is basically a contract between a trader and the exchange, it is advisable to trade on a reliable and regulated platform.

  • Contracts – To access various instruments, a trader can check the range of contracts and assets available at the exchange platform.

  • Trading Features – Stop loss, take profits, and other trading features enable a trader to minimize their losses in any market conditions.

  • Leverage – Traders may also want to access the features of leveraged positions. Before selecting an exchange, perform due diligence on the features offered by the exchange platform.

  • Fees – A trader needs to check the process of deposits, withdrawals, trading fees, etc before selecting a platform for crypto futures trading.

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Who Should Trade Futures

Everyone interested in cryptocurrency trading might start by trading futures. This financial instrument is especially suitable for those who want to get exposure to cryptocurrency. But, without actually holding it in digital wallets and bothering about its security.

Also, crypto futures enable different strategies and operations that cannot be implemented in spot markets with the same success. And that includes short-selling and scalping.

What Are The Cons Of Futures Trading

My Crypto Journey 2: Futures Trading

Some experts think that the underlying crypto market hasnt matured enough in order for a futures market to even exist.

They point to the volatility of Bitcoin as a minus, one that may even spread to other parts of the futures market.

Yet, as of now, no major incidents that involved crypto futures platforms took place.

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Introducing Micro Bitcoin Futures

At 1/10 the size of one bitcoin, Micro Bitcoin futures provide an efficient, cost-effective way to fine-tune bitcoin exposure and to enhance your trading strategies. Enjoy the same features as the larger Bitcoin Futures contract , at 1/50 of its contract size. Learn more about Micro Bitcoin futures.

CME Micro Bitcoin Futures

*Margin and Notional Value based on prices from 04/14/2021. Prices are subject to daily fluctuations.

Learn How Crypto Futures Trading Work

  • You must learn the initial and maintenance margin requirement for various cryptos. It will be different for each one of them. E.g., Bitcoin futures have very high margin requirements.
  • Also, keep in mind how closely the futures price tracks the spot price, the liquidity in the market, and how the other traders and market makers are positioned.

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How Profitable Is Crypto Futures Trading

Crypto futures trading can be very profitable if proper risk management is implemented. For regular traders, this activity can be more profitable than Bitcoin mining, given that the latter requires expensive equipment. However, this is the best-case scenario. As with any form of trading, there are considerable risks that should not be ignored.

How Does Investing In Crypto Futures Work

Crypto Futures Spread trading crypto arbitrage strategy

In general, crypto futures work so well because they provide a higher level of security and confidence to investors owing to the fact that exchanges that offer these services are regulated by the Commodities Futures Trading Commission. Secondly, since investment in crypto futures does not require investors to create bitcoin wallets, there is no physical exchange of cryptocurrency assets between the transacting parties.

The process of investing in crypto futures works quite similar to regular futures trading. The step by step process is as follows:

Step 1: Start an online brokerage or trading account on a platform that facilitates trading in cryptocurrency futures.

Step 2: Enter your personal details and wait for the online account to get approved.

Step 3: You can now choose the digital assets that you want to invest in or the futures in which you would like to start trading.

Trading in crypto futures is as simple as following this step-by-step process and understanding the application of margins and leverage for successful trading. The leverage amount that trading platforms set can widely vary and should be one of the major foundations for your trading decisions.

Moreover, the other major consideration is the margin amount, which is also the minimum collateral that has to be maintained in their account by the investor. Apart from this, the investor should consider the contract details in order to ensure that the payment terms are clearly defined.

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Speculating Future Price Movement

Another common use for derivatives in crypto trading is for price speculation of assets without purchasing the underlying asset. Traders can buy a futures contract instead of buying an actual Bitcoin or altcoins. That means a trader only needs to spend a minimal amount to gain exposure in the market. So, as the price of the underlying asset fluctuates, the trader can adjust his position accordingly. Most traders would use put options to manage their risks.

Do Future Settlements Have An Effect On Bitcoins Price

Futures of the global stock exchanges, such as NASDAQ, do have effects on the markets. Hence, its widespread to think that CME and CBOE Bitcoin futures carry the same impact on Bitcoins price.

This is sometimes true. Looking at the Bitcoins chart, compared with the futures settlement dates, often there was a price action which is likely to be ahead of the settlement event, but as you will see, not always theres such action.

The following chart shows Bitcoins price ahead of the June 29 CME six-month Bitcoin futures settlement.

We can also see Bitcoins price action during the most recent futures settlement on December 28, 2018:

Unlike June and December settlement, the futures settled in September 2018 had shown minor Bitcoin fluctuations.

To summarize the effects, despite that this could also be only a coincidence, we can assume in a high-probability that the CME and CBOE future settlements do affect the Bitcoins price.

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Futures Trading Vs Margin Trading

Futures contracts are traded in the derivatives market. The trading of the futures contracts is based on the deliverance of an asset on a future date. Futures contracts are not traded on the spot. The spot market is in simple words the market where assets and financial instruments such as commodities, currencies, and securities are traded instantly, on the spot.

Both of these trading whether margin trading or futures contracts allow traders to see bigger profits with the use of leverage. Which also means a bigger risk course. Both Margin and futures will charge users a trading fee.

If you are thinking of developing an exchange website and you want to add Futures and Margin trading to your platform then you have to consider that adding margin and futures features may affect the cryptocurrency exchange software development cost.

Reading Contract Details For Bitcoin Futures

What Is Futures Trading in Crypto and How Does It Work?

Below are the contract details for bitcoin futures offered by CME:

  • Contract unit: 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate
  • Price quotation: USD
  • Trading hours: SundayFriday, 6 p.m.5 p.m.
  • Product code: BTC
  • 50% cash of the contract amount
  • Listed contracts: Contracts listed for six consecutive months and two additional Decembers
  • Settlement method: Financially settled

Consider the following example for a CME Group bitcoin futures contract. Suppose an investor purchases two bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin, when the futures contract was purchased, is $5,000 each, meaning the total price for both futures contracts is $50,000. The margin requirements for bitcoin futures trading at CME is 50%, meaning that the investor has to deposit $25,000 as margin. They can finance the rest of the contract purchase by using leverage.

The contracts value varies based on the price of the underlying asset . The Bitcoin Reference Rate is used by CME to determine the price of bitcoin. It is the volume-weighted average price for bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.

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