What are Bitcoin Futures and how do they work?

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What Are Bitcoin Futures?

Bitcoin futures enable investors to gain exposure to Bitcoin without having to hold the underlying cryptocurrency. Just like a futures contract for a commodity or stock index, Bitcoin futures allow investors to speculate on the future price of Bitcoin (BTC). The Chicago Mercantile Exchange (CME) offers monthly contracts for cash settlement. This means an investor takes cash instead of physical delivery of BTC upon settlement of the contract.
The Chicago Board Options Exchange (CBOE) offered the first BTC contract on December 10, 2017, and discontinued offering new contracts in March 2019. The CME opened its Bitcoin futures platform on December 18, 2017. In addition to futures, it currently provides options on Bitcoin futures.
Meanwhile, Bakkt and Intercontinental Exchange offer daily and monthly Bitcoin futures contracts for physical delivery.

Understanding Bitcoin Futures

There are different benefits to trading Bitcoin futures instead of the underlying crypto. First, the contracts are traded on an exchange regulated by the Commodity Futures Trading Commission, which can give big institutional investors some measure of confidence to participate. Second, because the futures are cash settled, no Bitcoin wallet is needed. No physical exchange of Bitcoin takes place in the transaction.
These are the contract details for Bitcoin futures offered by CME:

  • Contract unit: 5 Bitcoin, as defined by the CME CF Bitcoin Reference Rate
  • Price quotation: USD
  • Trading hours: Sunday-Friday 6 p.m.-5 p.m.
  • Product code: BTC
  • Listed contracts: Contracts listed for 6 consecutive months and 2 additional Decembers
  • Settlement Method: Financially settled2

Bitcoin Exchanges

Bitcoin volatility is an important concern for normal investors and traders. Confidence is not helped by events like the collapse of Mt. Gox or Bitcoin’s outlaw image among governments. While high-volatility might worry some, for others huge price swings give trading opportunities.
Trader and speculators take advantage of these trends by buying and selling the digital currency through a regulated exchange such as Coinbase or Kraken. A bitcoin exchange operates somewhat similarly to online stock trading brokers where clients deposit cash (or Bitcoin) to carry out trades. Smaller exchanges offer limited services, including the ability to buy various cryptocurrencies (such as Bitcoin, Ethereum and Ripple) and digital wallets to store them. Bigger exchanges offer trading across different cryptocurrency and fiat pairs.

How to Buy and Sell Bitcoin

Like with stock trading, Bitcoin trading is usually conducted by matching buy and sell orders. These orders enter the order book and are removed when the exchange transaction is complete. To get started, investors should deposit funds in U.S. dollars, euros or another currency which is supported by the exchange. Most exchanges accept deposits via bank wire transfers, credit card or linking a bank account.
Some exchanges offer trading on margin. This enables traders to take a long or short position at several multiples the funds they have on deposit. A maintenance margin would have to be maintained to cover potential losses. As the account is depleted, a margin call is given to the account holder.

Special Considerations for Bitcoin

A Bitcoin exchange (like any online trading firm) charges customers a fee to carry out trades. However, cryptocurrency exchanges face risks from hacking or theft. Prudent investors do not store all their coins on an exchange. They use cold storage or hardware wallets for storage.
Now with Bitcoin futures being provided by some of the most prominent marketplaces, investors, traders and speculators are all bound to benefit. These centralized marketplaces will facilitate trade based on a trader’s outlook for BTC prices, gain exposure to Bitcoin prices, or hedge existing Bitcoin positions. To sum up, the availability of Bitcoin has facilitated price discovery and price transparency, enabled risk-management via a regulated Bitcoin product, and given a further push to BTC as an accepted asset class.

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