Bitcoin has become a compelling investment vehicle, piquing the interest of finance professionals and retail traders alike. The crypto market has many concentrated players. Still, the majority of open interest is held by investors who use diversification as a key part of their trading strategy. Though increased open interest serves as a positive indication of BTC’s price action, market volatility may be threatened, leading to unpredictable fluctuations. We know from experience that volatility means the potential for higher profits.
Futures contracts can be effective hedging instruments not only for Bitcoin but also for other major cryptocurrencies. They can be used to take advantage of temporary opportunities during periods of short-term volatility; many use BTC futures alongside other trade order types to maximize returns and protect their trading capital. Bitcoin futures can even grapple with tail risk, that is, the risk of extreme market moves. Even so, they may capitalize on the existence of extreme losses for other currencies.
Bitcoin Futures Are A Derivative Tool Traders Can Find On Crypto Exchanges
BTC futures are financial contracts whereby investors speculate on Bitcoin’s price direction without owning the cryptocurrency. They trade on the Chicago Mercantile Exchange (CME) and crypto exchanges. Two counterparties – the buyer and the seller – agree to exchange Bitcoin at a predetermined price and at a specific date in the future. All futures contracts have an expiry date. There are three choices when it comes to managing contract expiration: offsetting the position or liquidation, rolling over the futures contract, or settling the futures contract.
Offsetting in Bitcoin futures trading refers to purchasing/selling a futures contract to offset the current position. You implement an opposite and equal transaction to neutralize the trade. Liquidation means selling your BTC futures position in exchange for cash. The money goes into your account and can be used to acquire other contracts, or you can withdraw it for personal use. Rolling over involves closing an existing BTC futures contract and opening a new one with an expiry date for later. If a contract is cash-settled, settlement occurs in the form of a debit or credit.
Bitcoin Futures Trading Serves Three Purposes: Hedging, Speculation, And Arbitrage
The CBOE (Chicago Board Options Exchange) was the first to offer Bitcoin futures contracts in 2017, but they were abandoned as interest in crypto trading started to fade. In January 2024, trading resumed with the launch of Cboe Digital. The pioneering U.S. exchange for cryptocurrencies, facilitates both spot and leveraged derivatives trading. Spot markets ensure immediate settlement, while futures markets have predetermined settlement and delivery dates.
Key advantages of trading BTC futures include but aren’t limited to:
- Hedging: You can use futures to hedge the price movements of Bitcoin and mitigate the impact of extreme losses in the spot market. A perfect hedge would eliminate all market risk from your portfolio; the gain/loss on the futures position can be completely offset by the gain/loss on the sales of commodities.
- Speculation: The Bitcoin futures market is highly speculative due to its low margin requirements and volatility. A speculator is any individual or firm that accepts risk to make a profit. Futures contracts offer protection against adverse price movements because they lock in the price of Bitcoin ahead of time.
- Arbitrage: An arbitrage opportunity exists if Bitcoin futures prices are greater or less than the spot prices. If you identify considerable discrepancies between the futures market and the spot market, you can execute opposite trades in the two markets. There’s a chance to gain rewards with a minimal amount of risk involved.
As opposed to spot market trading fees, BTC futures contracts offer lower fees designed to help traders maximize their potential. If you execute large orders across multiple price levels, you’ll find futures trading to be a more efficient and cost-effective way to fine-tune your Bitcoin exposure.
Trading Tomorrow: How To Get Started With Trading Bitcoin Futures
Bitcoin futures offer much the same returns as traditional futures, but the derivative they’re based on is a crypto asset. The futures contracts that allow investors to gain exposure to the price movements of BTC expire on the last Friday of the month and are listed on the nearest six consecutive monthly contracts. They’re regulated by the Commodity Futures Trading Commission and must trade on regulated exchanges or swap execution facilities. Market participants must adhere to all applicable U.S. and local requirements; those with no experience should seek professional counsel as necessary.
Open An Account With A Bitcoin Futures Broker
You can trade Bitcoin futures at brokerages that are approved for futures trading and on many decentralized exchanges. The best platforms make available competitive margin rates, robust trading technology, powerful research amenities, and so forth; once your account is set up for cryptocurrencies and funded, you’re ready to trade. The complexities of futures trading can be overwhelming, so it’s recommended to read insightful articles and watch tutorials. You can profit from markets that are both rising and falling if your predictions are correct.
Have A Plan Before Entering Live Trades In The Futures Market
Many investors trade without a plan, that is, they don’t define specific risk and profit objectives. Even if they establish a plan, they second-guess trades, which isn’t part of a constructive problem-solving process. As a result, these investors overtrade and use their equity to the limit, which ultimately forces them to liquidate positions to prevent further losses in trading accounts. No amount of practice lets you perfectly execute every trade, but experience makes a significant difference between success and failure. A demo account lets you practice your strategies.
Concluding Remarks
With its rising popularity, BTC futures trading has become the focus of attention in the financial world, illustrating the growing interest in cryptocurrencies and their potential for considerable returns. Some exchanges will require you to take a short quiz to ensure you’re ready to take on the challenge. If you don’t pass the test, refresh your knowledge and update your trading skills to achieve better results. You should be able to find the right entry points and manage the leverage ratio to amplify potential profits.