101 guide: Bitcoin futures trading

Bitcoin futures trading lets you go long on Bitcoin if you want to bet on a price rise, or go short on Bitcoin if you want to bet on a price drop.

When you buy Bitcoin futures, what you’re actually purchasing is an agreement to receive a certain amount of Bitcoin, or the equivalent amount of money, at a specified time.

With this mechanism, you can profit from correctly betting that the price of Bitcoin will go up, which is called going long, or profit from correctly guessing that the price will go down, which is called going short.

Some of the exchanges where you can trade Bitcoin futures

There are several global exchanges where people can trade Bitcoin futures, but they aren’t all available to US residents. Check with the exchange you’re interested in to learn if they offer futures trading for American residents.

How Bitcoin futures trading works

Note that the following is a general guide only. Individual trading platforms may have variations on these systems.

In its simplest terms, Bitcoin futures works by having you deposit some money into a Bitcoin futures exchange and buying Bitcoin futures with it. Profits or losses will be realized when a futures contract is sold, or when it expires naturally.

You will typically be able to keep track of your realized profits or realized losses on an ongoing basis, which shows an approximation of how much you would gain or lose if you were to sell a contract at the current time.

Functionally, this is similar to watching your balance rise and fall as the market does.

The exact way your total realized profits and losses will balance out depends on how many contracts of which kinds you’ve purchased, the contract size and specifications, and what the market is doing.

Some of the factors that will affect how your realized profits and losses move are:

• Contract size. The contract size is simply how large each contract is. For example, if you bought a thousand contracts, each of which was equivalent to $1, you’d have $1,000 in the market. Sometimes contracts are valued in BTC or another cryptocurrency, and sometimes they’re valued in dollars or other fiat currencies.
• Long or short? Short contracts mean your balance will rise as Bitcoin prices fall and fall as Bitcoin prices rise, while long contracts mean your balance will rise when Bitcoin prices do and fall when Bitcoin prices do. You can simultaneously have multiple contracts of different types which can offset each other.

What is futures trading used for?

Beyond speculation, futures trading can also be used as a risk management tool and a way of playing the market in more depth.

Futures contracts can be used to multiply profits, mitigate risks and profit from falling prices. They can also be a very quick way of losing money if you get liquidated, which can happen very quickly when using 100x leverage.

Bitcoin futures liquidation and collateral

When you’re trading futures without leverage, the value of your futures contracts just rises and falls with the crypto markets as usual, according to your open contracts.

But when you’re using leverage, the money used to buy a contract serves as collateral and you’re essentially trading on borrowed money.

Just like leverage can help you quickly make more money on correct bets, it can also be a very fast way of losing all your funds on incorrect bets. If the markets go the wrong way, you can lose you entire deposit.

For example, if you’re trading with 100x leverage, then a price change of just 1% could be enough to wipe out all your collateral and trigger liquidation.

Different exchanges will often have different liquidation thresholds. For example, some might close your orders once you’ve lost at least 80% of your collateral, and account for fees in different ways.

What are the fees for future trading?

A range of fees may apply, including:

• Trading fees. There will typically be a commission fee for buying and selling futures contracts, similar to buying or selling cryptocurrency outright.
• Extension fees. Fees may apply for extending a contract past its usual close date.
• Overnight fees. Fees may apply when contracts open through certain time periods.
• Interest payments. When you margin trade, you’re borrowing money to leverage your trades. There will often be a cost for actually borrowing that money.
• Deposit and withdrawal fees. You might have to pay fees for transferring money in or out of an exchange.

Where can I trade Bitcoin futures?

Some traditional trading platforms now offer Bitcoin futures, as do a number of dedicated cryptocurrency exchanges and forex trading platforms.

Is Bitcoin futures trading safe and regulated?

All of the Bitcoin futures exchanges listed on this page are large, well-known and have a reputation for being legitimate.

How well regulated an exchange is depends largely on where it’s based. Some are largely unregulated, while others such as CME are relatively tightly regulated.

But to a certain extent, Bitcoin futures trading is always at least a bit dangerous given the volatility. Even on a perfectly legitimate exchange, it’s possible to quickly lose money.

Frequently asked questions

• What are perpetual swaps?

  Perpetual swaps are a type of futures contract created specifically for cryptocurrency. As the name suggests, these contract types are indefinite without any set expiration date.

• How do futures contracts pay out?

  Depending on the contract, profits may be realized in either Bitcoin or the fiat currency equivalent.

• Do I have to own any Bitcoin to trade Bitcoin futures?

  It depends on the platform. Some will let you simply trade contracts that track Bitcoin prices with fiat currency deposits, while others will require you to deposit Bitcoin collateral.