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Bitcoin futures trading
Find out how Bitcoin futures trading works and why people do it, in this simple guide.
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. It’s generally regarded as a risky way of trading, more suited to advanced traders than beginners.
Some of the exchanges where you can trade Bitcoin futures
|Exchange||Leverage||Cryptocurrencies||Time frames||Learn more|
|Kraken||Up to 50x||BTC, ETH, LTC, BCH, XRP||Perpetual, monthly, quarterly|
|BitMEX||Up to 100x||BTC, ETH, BCH, ADA, EOS, LTC, TRX, XRP||Perpetual, weekly|
|Bitfinex||Up to 3.3x||BTC||Perpetual|
|Huobi Global||Up to 20x||BTC, ETH, EOS, LTC, XRP, BCH, TRX, BSV||Weekly, bi-weekly, quarterly|
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 which 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 your balance will fall as Bitcoin prices rise, while long contracts mean your balance will rise when Bitcoin prices rise and fall when Bitcoin prices fall. You can simultaneously have multiple contracts of different types which can offset each other.
- Leverage. Functionally, this magnifies how much your balance rises or falls when the markets move. If you’re using 100x leverage on a contract, your balance will rise or fall 100x faster than normal for the size of that contract. 100x is typically the highest leverage an exchange will offer and you can have different leverage on different accounts.
- Expiration date. This is the date at which a contract is automatically closed and settled up. You can generally sell your contracts and pocket the gains or losses at any time, but when there’s an expiry date, that’s when the futures will close. They can sometimes be extended and many exchanges will also offer “perpetual contracts” which don’t have any expiry date.
Perpetual contracts don’t have a set expiry date, while other futures contracts do.
Bitcoin perpetual futures contracts, or “perpetual swaps,” will typically track the spot price (the current market price) of Bitcoin.
Futures contracts with set expiry dates will often trade higher or lower than the current market prices, to account for the uncertainty of future Bitcoin prices.
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 your 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 of 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 futures 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.
These are used to facilitate trading during specific hours, in well-regulated, legitimate and largely transparent environments.
Is Bitcoin futures trading safe and regulated?
Bitcoin futures trading is never safe. The markets are prone to manipulation and unpredictable price movements. You can do everything right and still lose money. Some exchanges are also safer than others, depending on how reliable, regulated and legitimate it is.
How well regulated an exchange is depends largely on where it’s based. Some are largely unregulated, while others such as CME and Cboe are relatively tightly regulated.
Pros and cons of Bitcoin futures trading
Compared to simply buying and selling Bitcoin, futures trading has some benefits and drawbacks.
- It lets you speculate on Bitcoin prices without owning Bitcoin
- You can bet on price rises and falls
- You are able to apply leverage to multiply risks and potential returns
- Can be used to hedge against unexpected price moves
- Cannot be used to buy Bitcoin, except where trades are settled in BTC rather than USD
- More complicated and difficult than simply trading Bitcoin
- High risk compared to simply buying Bitcoin
- Bitcoin markets are unpredictable and prone to manipulation, which can lead to liquidation
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