Bitcoin (BTC) Futures Trading Guide
BTC futures have existed since the latter part of 2017. Bitcoin futures are available on several regulated exchanges. It is a new form of trading instrument that originated from the everyday stock market. The concept of Bitcoin’s future is one that many are yet to understand. This guide aims to give insights into the idea of BTC Future. How can they be traded, and what exchanges can be used to carry out trading in Bitcoin future? Before we go deeper to explain the Bitcoin future concept, let us, first of all, explain the meaning of futures.
What does the term futures mean? Futures are regarded as a financial contract in stating an agreement to sell or purchase an asset for a stipulated price on a particular date. After both parties have signed futures contracts, they must buy or sell the asset at the agreed price irrespective of the cost of the asset then. Futures are used as a tool to hedge prices at a fixed amount to mitigate situations of price fall. It is also used as a vehicle for speculating trading.
Types of futures contracts
Futures are classified into two major types, which include cash-settled and deliverable.
Deliverable Bitcoin Futures Contract
In the case of a deliverable, a buyer buys a physical asset as part of the contract. A tangible asset may range from crude oil, Bitcoin, shares in Apple, etc. The asset has to be purchased at the end of a contract.
Cash Settled Bitcoin Futures Contract
The cash-settled type of future is very different from the deliverable. In this case, there is no physical purchase of an asset. Since you are not required to deliver any tangible asset, the speculation of the value of an asset is used in this regard to negotiating futures.
How do futures work in trading?
The concept of futures trading is similar to that of trading in real assets. Ideally, you have to wait to get a preferred price of an asset before deciding if it’s profitable to buy or sell. Every transaction has to be carried out to completion before the contract expires. To paint a clearer picture of how futures can be traded, we shall look at this scenario. Take, for example, Peter is planning on trading Amazon’s futures during a contract that aims to span from January 1st to March 1st. In line with the terms of a contract, Peter can purchase futures at a time within the contract window. Peter also has to ensure that the futures are sold before March 1st, which is the date of the contract expiration.
By so doing, Peter may either lose or earn money depending on the value of Amazon shares. Peter can sell futures even without purchasing one in the first place. To do this, Peter speculates the value of Amazon’s shares and decides to sell the futures contract. Peter would have to request a contract from an exchange platform, sell the contract and then purchase the contract again, but this time at a much lower price than the amount it was bought. Peter makes his profit based on the difference in the price of the contract sold and bought back
Bitcoin futures ( how it works)
A type of contract that is tied to a specific asset is known as Futures. Futures may be in the form of different types of an asset like stocks, shares, commodities, or bitcoin. When futures have Bitcoin as the primary asset type, then they are known as Bitcoin futures. What this means is that the futures contract is based on the speculative price of Bitcoin. Bitcoin futures may be used as a tool to hedge Bitcoin and to mitigate the risk of losing your investment.
Chances of playing short or long
The growth or price forecast of Bitcoin is used as a determinant factor for a ‘long’ BTC futures position. A trader may purchase a contract at the actual price and choose to sell it when the price of Bitcoin increases. Earnings made is the difference between the selling price and the contract price. A long Bitcoin future position is said to be termed as a favorable outcome or forecast because the trader makes a profit from buying and selling Bitcoin futures contracts. An unfavorable outcome or forecast e is used in describing a short bitcoin future position. Traders may be able to trade using cash-settled or deliverable types of Bitcoin futures depending on their choice and available exchanges.
Why trade on Bitcoin futures?
Some traders might wonder why they should have to trade futures when buying or trading physical assets is very much possible. Since the idea of bitcoin futures is similar to trading, which involves buying at a lower price and selling when the price may have increased. However, trading on Bitcoin futures have several advantages over trading physical assets which include the following
Physical ownership of Bitcoin is not necessary
There is no need for you to own Bitcoins physically. Futures are a form of contract and not the ownership of an asset. The issues that may arise about the safety of your Bitcoins would be of less importance to you as you will not need to worry about cyber attacks or hackers. It also puts your mind at ease because you are only dealing with a contract that works according to price speculation with no real attachment to buying the physical asset itself.
Access to leverage trading
Leverage gives you the option to engage in trading with more than the actual amount of money that you have in your trading account. With leverage trading, you may pay less than the real value of the asset, but you have to be careful due to the high risk involved, primarily due to improper calculation of the outcome.
You can earn money from price speculation
Trading on Bitcoin Futures allows you to make a profit from correctly speculating the upward price of Bitcoin, which is referred to as long trading. It is possible to earn profits by predicting the downward valuation of Bitcoin, which in this case, refers to short trading.
What else you should know about Bitcoin Futures
The Bitcoin futures market is competitive with high requirements. The price of contracts may be high, and in many cases, it is pegged at the equivalent Bitcoin price in the financial market. However, the cost of the contract depends on the exchange company you are transacting with. Hence, the Bitcoin futures market may be reserved for experienced traders who have the capital to go ahead with the trade. Some exchange platforms may request as much as 50% margin security. Such an amount is ridiculously high in comparison to traditional assets that may require only 10% margin security fees.
It is important to note that futures are solely for trading purposes and may not be suitable for holding. It may be difficult for you to wait and see if the price will increase before trading because it is a contract that has a stipulated time, which must be strictly adhered to. In other words, all obligations of the Bitcoin futures have to be fulfilled before the date of expiration specified in the contract. Participants in the agreement may need to have a mutual settlement, which may involve the payment of the variation margin or price difference. A mutual agreement may also include paying for the asset that was delivered.
What to consider when selecting a Bitcoin Futures exchange?
Just like trading of assets, there are also several exchanges where traders who may be interested in trading BTC futures can carry out trading effectively. However, there are specific factors that have to be considered before you may choose to go into a trading agreement with a Bitcoin Future exchange. the following are elements that have to be considered in your selection for an ideal Bitcoin future exchange
Reliability of the exchange
It is significant to find out how reliable the exchange platform is before going ahead with the terms of the agreement. You can check the reviews of customers who may have had transactions with the exchange and see what they say about their service. The reliability of exchange means that you can always count on the exchange to stick to the contract terms so that there will not be an able conflict of interest at the end of the day.
Ease of banking
Selecting the ideal exchange for Bitcoin futures trading requires you to identify and analyze the various areas of service provided by the exchange, one of which is the ease of banking. How well can you make a deposit and request for withdrawal of funds? Even though you may be borrowing a contract from the exchange, you may still be required to provide a certain amount of money as security for the contract lent out to you. Ensure that there are no additional or hidden charges that come with the transaction. An exchange that offers multiple options for payment is also ideal for preventing any form of delay since Bitcoin futures are time-bound.
The security of any exchange company should be paramount to any trader when searching for the right exchange for Bitcoin future exchange. Your details should be safe. Although you are not buying the asset physically and may worry less about the safety of your asset, it is imperative to consider how safe it is to provide your payment details and other sensitive information on an exchange platform. The platform should have advanced encryption tools to help in securing user data and preventing unauthorized access to this personal information.
Trading in Bitcoin futures requires considerable investment capital, and it would be foolhardy to go into business with a broker that is difficult to contact, especially if there are challenges along the way. An ideal Bitcoin future exchange should provide traders with an avenue to contact them and attend to complainants or help resolve queries. Some exchanges provide around the clock customer service for their customers while the others are open for business only during business days (Monday to Friday).
What are the various Bitcoin future exchange companies available?
As earlier stated, there are several crypto exchange companies available in the financial market. We have listed some of the different exchange platforms which you may use in carrying out BTC futures trading activities. They include the following:
CBOE is regarded as one of the prominent and largest Bitcoin futures exchange company. It began its Bitcoin futures operation in December 2017.
CME is a bitcoin future exchange derivative that was established in 2017. However, in 2019, the Company witnesses a surge in the volume of Bitcoin futures traded via the exchange since inception.
BitMex is seen in some quarters as one of the most popular crypto exchange company that offers Bitcoin futures contracts. However, this exchange is unavailable to residents in the United States.
OKEx is a cryptocurrency trading company that is based in Hong Kong. The platform may be used by traders to carry out trading in Bitcoin Futures. It is widely used in the Asian continent but is also not available for residents in most other countries, including the US.
Many traders of Bitcoin Futures have anticipated the launch of Bitcoin future by a platform that can provide seamless trading services for all investors. Bakkt is among the anticipated companies which launched its Bitcoin future platform in September 2019 after a series of delays due to regulatory issues.
Bitcoin Future Regulations
The first primary institutional development regarding. Since that time, there have been numerous developments to ascertain the status of Bitcoin as an asset with a possible Bitcoin ETF offering.
The exchange commission (SEC) has denied the applications for launching Bitcoin ETFs. The reason given by the regulatory body for the denial of a license to exchange companies was that Bitcoin futures are not liquid or mature enough to be able to support Bitcoin ETFs. SEC has, in recent times, postponed its decision to rule on an ETF proposal from exchange platforms like SolidX and VanEck.
Factors that affect your profits when trading Bitcoin future
When trading Bitcoin Futures, it is critical to put some elements into consideration. These factors may determine the amount of profit you may generate from your trading, and they include the following:
- Contract size
The size of the contract refers to how large the contract may be. If a trader buys about one thousand contracts at a rate equal to $1, it means that the trader has a total of $1,000 in the financial market. In some cases, the size of a contract is valued concerning Bitcoin or other cryptocurrencies. Contracts may also be valued in other forms of fiat currencies.
- Long or short
Short contracts have to do with the rice or fall of the account balance as controlled by the fluctuating price of bitcoin. When the price of bitcoin rises, you will have a lower balance. A higher balance is observed due to a fall in the amount of bitcoin. A long contract is the direct opposite of short contracts.
Leverage plays a significant role in determining how much your balance will fall or rise as a result of market instability. You will have a higher balance when using the leverage of 100x than other leverage types. 100x is the most top type of leverage that is offered by an exchanger.
- Expiration Date
The expiration date refers to the termination day of the contract. All transactions must be ended before this time, regardless of whether you are getting a loss or profit. However, some exchanges offer an extension for traders.
What fees may be associated with BTC future trading
Different types of fees may apply when trading Bitcoin futures; they include the following:
- Trading Fees
These are fees charged as commission for buying and selling of Bitcoin futures contracts.
- Overnight fees
Overnight fees refer to fees that apply to a trader when contracts are open around specific periods.
- Extension fees
Traders are charged this fee when a contract is extended beyond its day of expiration
- Withdrawal and Deposit fees
As the name implies, these fees apply when a trader makes withdrawal or deposits in a Bitcoin future exchange platform.
- Interest payment
For every leverage collected to carry out a trade, the broker receives a particular amount as interest.
Trading BTC futures is a unique way of trading without having to buy the asset itself. There are several Bitcoin futures exchange platforms that offer traders a chance of speculating the prices of Bitcoin and still make money from it.it is crucial that traders appraise the performance and reliability of an exchange platform either through customer reviews or by trying out the platforms by yourself while using the minimum deposit required as a started.