Bitcoin futures trading guide

Learn 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.

Things to consider before getting into bitcoin futures trading

Let’s talk about three main things you should consider before getting into bitcoin futures trading.

1. The main consideration 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 purchasing bitcoin and attracts more speculators into the market.

2. Another consideration 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.

• How is bitcoin futures trading regulated?

  It may depend on the exchange, the country in which it’s based and the country its traders are in.

  In the case of the Chicago Board of Options Exchange (CBOE) and other options markets, there is self-regulation by the exchanges themselves, and they are required to operate in line with the Commodity Futures Trading Commission (CFTC) regulations.

  The CFTC theoretically has the authority to enforce regulations against bitcoin price manipulation and similar problems. However, it has no real authority outside the US, and even inside the US it has stated that its regulatory authority is limited.

  For example, the CTFC previously cracked down on the Bitfinex cryptocurrency exchange. For all practical purposes, this only had the effect of barring US-based traders from openly using it and limiting its ability to accept fiat currencies.

  Bitfinex is still a popular cryptocurrency exchange around the world and can be easily and discreetly accessed from inside the US with VPNs.

  This highlights the practical differences between having cryptocurrency laws on the books and actually being able to enforce them.

3. A third consideration is that it can be a 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 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

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

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

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.

• What do you mean they’re all the same?

  They all work the same. They just approach the market in different ways. The only real difference is that crypto exchanges accept bitcoin as a cryptocurrency, forex exchanges consider it to be a currency and options exchanges consider it to be an asset.

  • Cryptocurrency exchanges like BitMEX were created because people wanted to trade bitcoin futures and none of the established exchanges offered that. These services offer 24-hour-a-day, 7-day-a-week trading.
  • Forex exchanges simply added bitcoin and other cryptocurrencies to the list of currency pairs they trade. They regard bitcoin as a currency and use typical forex trading terminology, describing spreads in “pips”. These services often offer 24-hour trading.
  • Options exchanges like CBOE trade contracts on the future value of bitcoin for certain points in time. For example, you might buy a contract that predicts bitcoin will have increased in price in two months’ time. These services usually only operate during scheduled trading hours.

  In all cases, you are making a prediction regarding the future value of bitcoin and accessing a similar range of features, such as leverage.

  If you’re comfortable with forex trading, then you might find that to be a more familiar option. If you’re more comfortable with traditional options trading, you might prefer to do it at an options or cryptocurrency exchange instead.

How to choose an exchange

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

• 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 the following fees:

• 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 with an international wire transfer. You can also get lower fees with platforms that accept USD because you’ll be avoiding 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.

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 the following:

• 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. 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 their holdings 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 following are the two main types of trading that take place on these exchanges:

• 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?

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.

You will need to decide whether this implies that futures trading has been driving up the price of bitcoin and might continue to do so.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”.