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.
The advantage of bitcoin futures trading
Let’s talk about three main advantages of bitcoin futures trading.
- 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 GBP or USD. 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 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 have 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 UK
The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. Your capital is at risk.
Spread bets and CFDs are leveraged products and can result in losses that exceed deposits. The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Please ensure you fully understand the risks and take care to manage your exposure.
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. 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.
Traditional exchanges include well known networks like the New York Stock Exchange (NYSE), London Stock Exchange (LSE), 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 come down to 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, and platforms that accept GBP, so you can 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 2 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 2 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” markets for no particular reason. Both will typically be available at all exchanges, but it’s worth making sure.
- Leverage. This is a feature which lets you magnify your bets, with the effect of increasing your profits or losses. It’s designed to help traders realise 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 limits, profit takes and other features. These can let you automatically (or manually) cash out and cancel orders before their initial expiry date. For example, you might add a “profit take” to a long order, and then once it hits a certain price it will automatically cash out your profits to protect it 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 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, and 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 cryptocurrency to their tradable currency pairs. By popular demand this quickly expands to Litecoin, Ripple, Monero, Dash and many other popular cryptocurrencies.
- 12 December 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.
- 17 December 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.
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. For example, South Korea’s ban on bitcoin futures trading.
- Deliberate market manipulation from “whales.”
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