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A guide to Bitcoin futures trading

Find out how Bitcoin futures trading works and why people do it in this simple guide.

Disclaimer: 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.

Bitcoin futures contracts enable you to speculate on whether the price of Bitcoin will be higher or lower than it is now by a set date.

If you think the price will rise, you go “long” and if you think the price will fall you go “short”.

This is different to buying and holding Bitcoin on the spot market or in your wallet because it allows you to potentially profit regardless of whether the price rises or falls.

It’s important to understand that, unlike the spot market, you don’t actually buy any BTC and therefore you don’t own any BTC when you purchase a futures contract.

Rather, when you buy a Bitcoin futures contract, 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.

Despite their advantages, futures contracts are regarded as a very high-risk way of trading and suited more to advanced traders than beginners. This is partly because futures trading often involves the use of leverage, which increases the chance you will make a losing trade if the market moves against you.

This guide will explore the basics of trading Bitcoin futures, discuss the risks involved and provide you with a list of exchanges you can use to trade Bitcoin futures.

Disclaimer: 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.

Where can I trade Bitcoin futures?

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Binance Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, P2P
USD, AUD, GBP, EUR, RUB, TRY, NGN, UAH, PHP, CZK & 60+ more

370
cryptocurrencies

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KuCoin Cryptocurrency Exchange
KuCoin Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, PayPal, P2P
USD, EUR, GBP, RUB, CNY, AUD, KRW, JPY, TRY, VND

743
cryptocurrencies

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

Traditional exchanges that now offer Bitcoin futures during specific hours include CME and Cboe. These exchanges facilitate trading during specific hours, in well-regulated, legitimate and largely transparent environments.

How to trade futures on Binance — A beginner’s guide

How Bitcoin futures trading works

Must-read

The following is a general guide explaining how to trade Bitcoin futures. Individual trading platforms will have variations on these systems.

1. Entering a trade

To trade Bitcoin futures contracts, you will first need to deposit funds (usually cryptocurrency) on to a trading platform that offers futures trading for BTC.

You will then purchase a futures contract to enter your trade. These are usually time-based, which reflects the expiry date. The expiry date refers to when the contract settles, and you either take a profit or loss if you still hold the contract. The most common types are monthly futures, quarterly futures and perpetual futures. Perpetual futures do not have an expiry date and continue indefinitely.

Must-read: Perpetual contracts vs futures contracts

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.

2. Taking profit

Profits or losses will be realised when a futures contract is sold, or when it expires naturally.

You will typically be able to keep track of your “realised profits” or “realised 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 investment balance rise and fall as the market does.

The exact way your total realised 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.

You should take time learning how the specific platform you’ve chosen to trade on handles futures contracts, or else you could make a mistake and lose funds.

Some of the factors that will affect how your realised 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.
  • 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. Leverage increases your risk and chance of losing money.
  • 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.

How to trade a Bitcoin futures contract?

Here is a step-by-step guide to help you trade your first Bitcoin futures contract with KuCoin. KuCoin is not available to residents of countries in its Restricted Locations.

  1. To begin, you need to open an account with the exchange. Depending on the platform and where you reside, you may go through additional verification to be allowed to trade futures.
  2. Next, you will need to fund your account. You can either purchase cryptocurrency on the exchange or transfer existing funds to your exchange account. Once done, you can then transfer these assets to your futures account.Kucoin site
  3. Your deposited funds can then be used as collateral or margin.Deposit Bitcoin Futures
  4. Select the type of futures contract you want to purchase. There are two key things you will need to decide on – the duration and the margin type. The duration refers to how long the contract is held open for and the margin type determines what currency is used for margin and what currency the contract is settled in. For instance, a USDT-Margin Perp is a perpetual duration contract that is funded and settled using USDT.
    Futures contract
  5. If desired, you can choose the leverage for your BTC futures contract. The amount of leverage available to you will depend on several factors, as well as the platform you have chosen to trade on. Higher leverage carries a higher liquidation risk, thus you should be wary about using leverage. 100x is considered extremely high risk and only for experienced traders – your capital is at risk. Consider using a demo account first before you trade real money using leverage.
  6. Next, set your investment size and direction. You may go long if you think BTC’s price will rise, or short if you think BTC’s price will fall. Place order
  7. Finally, decide on the type of order you wish to execute. For example, two of the basic order types available on KuCoin are buy-limit and stop-market order. Other types of orders you might see include stop-limit, buy-market, take-profit limit, take-profit market and trailing stop, among others.

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 as well as all of the money you put up as collateral.

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.

Binance futures fees explained

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.

Traditional exchanges that now offer Bitcoin futures include CME and Cboe. The most popular native crypto exchange that supports Bitcoin futures is Binance.

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

Risks of trading Bitcoin futures

While the potential to make profits through the trading of Bitcoin futures is immense, there are several downsides that you need to consider before you delve into this financial instrument. A few of these factors are listed below:

  • Regulations. Many countries have not yet formalised and implemented a legal and regulatory framework for crypto assets specifically (including derivatives based on underlying crypto assets). However, various regulators worldwide, including the SEC in the US, have issued public statements warning investors of the risk of “devastating losses” due to the “exceptionally risky” and “often volatile” nature of crypto assets.
  • Not suitable for most investors. Bitcoin futures are not simple in nature, they are complex financial instruments that a beginner investor might find difficult to wrap their head around.
  • Losses not limited to funds deposited. Since futures contracts are margin products, the losses (and the gains) are usually amplified. You stand the chance to lose your entire investment but not just that, it goes beyond that. Your losses are not limited to the equity and funds in your account while trading. In case of a huge loss, you may be required to pay up additional funds to cover the losses as you’re legally liable to do.
  • Volatility. As mentioned earlier, Bitcoin is an extremely volatile asset, despite being the flagship cryptocurrency. Due to this, there have been times when the asset fluctuated by more than 20% in a single day which is much higher than what traditional equities and commodities markets traders are used to.
  • Influence on spot markets. In regulated financial markets, futures are usually considered to be the indicators of price thus contributing to the volatility of the underlying asset. But since the size of the crypto futures market is currently limited to being a fraction of the spot markets, the influence is limited as well. Although as the market grows, so will its influence of spot markets as seen in traditional futures markets where the size of the futures market is several times the size of the spot markets.

Pros and cons of Bitcoin futures trading

Compared to simply buying and selling Bitcoin, futures trading has some benefits and drawbacks.

Pros

  • It lets you speculate on Bitcoin prices without owning Bitcoin.
  • You can bet on either direction of the price volatility of Bitcoin.
  • You are able to apply leverage to multiply risks and potential returns.
  • Can be used to hedge against unexpected price moves.

Cons

  • Cannot be used to buy Bitcoin directly.
  • More complicated and difficult than trading Bitcoin on the spot market.
  • Highly risky compared to holding Bitcoin.
  • Bitcoin markets are unpredictable and prone to manipulation, which can lead to significant losses, including losing more than the value of the amount traded.
  • It is a market for sophisticated traders and speculators and should not be used by those who are new to, or inexperienced at trading, or have limited knowledge of investing strategies and financial concepts.

Frequently asked questions

Disclaimer: 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.

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