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Bitcoin futures trading guide

What exactly it is, how to start and how it works

Futures trading is when you place an order to buy or sell an asset at a future price, rather than the current price.

Don’t get mystified by the lingo. It’s all a lot simpler and easier than most traders would have you believe.

This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

The advantage of bitcoin futures trading

Let’s talk about three main advantages of bitcoin futures trading.

1. The main advantage of bitcoin futures trading is that you don’t actually have to own any bitcoin in order to trade BTC futures. This means you don’t have to set up a wallet or actually take possession of the coin. Instead, you can just profit (or lose money) directly through fiat currency such as US dollars. This removes another obstacle to bitcoin investment and attracts more speculators into the market.

2. Another advantage is that it offers the perception of a safer and more regulated environment in which to trade bitcoin. Options exchanges are tightly regulated, which brings a dose of legitimacy to the volatile cryptocurrency market.

3. A third advantage is that it can be an extremely useful tool for cautious traders who want greater protection from the natural volatility of bitcoin.

For example, a trader who holds a lot of bitcoin but thinks the price will experience a downturn is able to “short” bitcoin and make a net profit from the downturn even though the bitcoin has lost value. Or a “bullish” trader who thinks the price of bitcoin will increase can “go long” on it and profit from bitcoin going up, without actually holding any.

Where to trade bitcoin futures in the US

Details Features
BitMEX Bitcoin Trading Exchange
BitMEX Bitcoin Trading Exchange
Trade cryptocurrency derivatives with high liquidity for bitcoin spot and futures, and up to 100% leverage on margin trading.
  • Fees: Varies by trading type
  • Supported countries: Worldwide with exceptions
  • Deposit methods: BTC only
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eToro Social Crypto Trading
eToro Social Crypto Trading
Copy the trades of leading cryptocurrency investors on this unique social investment platform.
  • Fees: Spreads
  • Supported countries: Worldwide (some exceptions)
  • Payment methods: Credit card, PayPal, bank transfer
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You should check that the cryptocurrency trading platform allows traders from your country of residence before signing up.

Bitcoin is a cryptocurrency, so it’s part asset and part currency. This means there are a few different places to trade and speculate.

  • Cryptocurrency trading platforms. Invest in cryptocurrency futures by trading bitcoin against cryptocurrencies or fiat currencies.
  • Foreign currency exchanges (forex). Invest in bitcoin futures by trading bitcoin as part of a currency pair.
  • Options exchanges. Invest in bitcoin futures by anticipating the future price of BTC in US dollars.
Over-the-counter (OTC) exchanges vs. traditional exchanges

Traditional exchanges include well-known networks like the New York Stock Exchange (NYSE), Chicago Board of Options Exchange (CBOE) and more.

These are used to facilitate trading during specific hours in well-regulated, legitimate and largely transparent environments.

In contrast, OTC exchanges are smaller networks of almost any other kind.

Which option is the best?

All of them are basically the same. The main differences come from your choice of individual platform rather than what type of trading you’re doing.

How to choose an exchange

Regardless of what type of exchange you select, you should consider:

  • Fees and transfer methods
  • Accepted currencies and available contracts
  • Features of the exchange
  • Does it suit your trading style?

Fees, transfer methods and accepted currencies

There may be:

  • Deposit fees: Fees for making a deposit to your trading account.
  • Withdrawal fees: Fees for making a withdrawal from your trading account.
  • Commission or brokerage fees: Fees for setting up a trade or placing an order.

The deposit and withdrawal fees will largely depend on the accepted transfer methods and currencies at each exchange.

For example, you can expect lower fees with a local bank transfer than an international wire transfer, as well as platforms that accept USD so as to avoid currency exchange fees.

Accepted currencies and available contracts

These are the actual products being sold on different platforms. Depending on the type of platform, they might be described in different ways.

    • Currency pairs. This is what they’re called on forex platforms and some cryptocurrency exchanges. For example, you might see a product called a BTC/USD currency pair. This would let you bet on the price change between Bitcoin (BTC) and US dollars (USD) in a set timeframe, such as the next two months.
    • Futures contracts. These will often be given their own codes on options exchanges and cryptocurrency trading platforms. For example, you might see a product called “XBTG8”. This might be a contract that predicts an increase in the price of bitcoin (in US dollars) in two months’ time.

As you can see, they’re the same thing but might simply be called by different names.

XBT and BTC

Bitcoin itself might also go by different names on different platforms. Sometimes it’s coded as “BTC” and sometimes it’s coded as “XBT”.

To choose a platform, look at the actual products, including the currencies that bitcoin is valued relative to and the types of predictions available.

Features of an exchange

Some of the main differences between trading platforms are the available features.

The most important ones are widely available but still aren’t found at every exchange. You may want to look for a platform that offers:

  • Shorting. Going “long” means betting on a price increase, but “shorting” means betting on a price drop. In trader talk, these will also be respectively referred to as “bull” and “bear” runs for no particular reason. Both will typically be available at all exchanges, but it’s worth making sure.
  • Leverage. This is a feature that lets you magnify your bets, with the effect of increasing your profits or losses. It’s designed to help traders realize a decent return on investment without needing to make enormous deposits up front. You will often see leverage described as something like “20:1”. In that case, your gains and losses would be as though you were buying and selling with 20 times the volume of your initial deposit. It increases both risk and reward, and should be used with caution. The maximum leverage available will vary by platform and product.
  • Hedging. This is the ability to take out contracts that are opposite to a currently held position. For example, if you bet on a big price increase but it’s starting to look like an unreasonable risk, you might hedge by taking out a smaller new bet for a price decrease at the same time. This can help you manage your risks.
  • Stop losses, profit taking and other features. These can allow you to automatically (or manually) cash out and cancel orders before their initial expiration date. For example, you might add a “profit take” to a long order so that once it hits a certain price, it will automatically cash out your profits to protect against later drops.

Does it suit your trading style?

The two main types of trading that take place on these exchanges are:

  • Day trading. Buy and sell multiple times per day with multiple order types, all with the aim of making a net profit on the same day.
  • Longer-term trading. Take out longer-term contracts that don’t need a lot of maintenance, then come back later to see how your predictions went.

Different platforms and features will better suit different trading styles.

Bitcoin futures trading timeline and history

  • 2014. Large cryptocurrency trading platforms, including Bitfinex and BitMEX, are founded to start facilitating cryptocurrency trading. Bitcoin futures start being widely traded, alongside many other cryptocurrencies.
  • 2014-2017. Foreign exchange platforms start adding cryptocurrencies to their tradable currency pairs. By popular demand, this quickly expands to Litecoin, Ripple, Monero, Dash and many other popular cryptocurrencies.
  • December 12, 2017. CBOE becomes the first traditional exchange to start offering bitcoin futures with a self-regulating framework. The launch is opposed by other traditional exchanges, which argue that it hasn’t done the necessary risk-prevention legwork.
  • December 17, 2017. Chicago Mercantile Exchange (CME) becomes the second established traditional exchange to trade bitcoin futures.

What does bitcoin futures trading mean for the price of bitcoin?

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Updated: 25 Feb 2018 21:40:10 UTC

Some spokespeople from futures markets have said that they’re seeing a lot more business on the “long” side of the market than the “short”, suggesting that more people expect bitcoin prices to increase and have been indirectly buying bitcoin on forex and options exchanges.

This implies that futures trading has been driving up the price of bitcoin and might continue to do so.

On the other hand, it also gives traders a realistic way to profit from downturns in the bitcoin price, which gives large bitcoin owners more of an incentive to sell without as much concern for any price drop that might result.

On the other hand, the same also works in reverse. Big investors might as well go long on bitcoin while simultaneously buying up bitcoin to spur a price increase. They can then sell bitcoin later at additional profit.

With other investments, this type of price manipulation might be illegal, but cryptocurrencies are still largely beyond regulation, and the somewhat anonymous nature of bitcoin means it’s extremely difficult to actually prove any deliberate market manipulation.

To consider the future of bitcoin prices, you should take into account:

  • Bitcoin’s supply and demand patterns
  • New legislation and other news events that might impact pricing. One example is South Korea’s ban on bitcoin futures trading.
  • Deliberate market manipulation from “whales”.
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