A comprehensive guide to Bitcoin and crypto futures, their advantages, and how to trade them.

The crypto asset class is maturing as traditional investment instruments move their way into the digital assets industry. From 2008, when just a few crypto enthusiasts noticed the invention of Bitcoin, the industry has grown much more sophisticated and mature. The futures market, which has been a prominent trading instrument in traditional financial markets including stocks, commodities, and equities, has now adapted for the crypto industry as well.

Bitcoin and crypto futures have unlocked new strategies for traders and are now gaining massive popularity. In this article, we review bitcoin and crypto futures, how to trade Bitcoin futures, and which considerations can be useful.

What are Bitcoin Futures?

Traditional crypto trading focuses on “spot trading” - buying and selling Bitcoin at the current price. In this practice, a trader can only generate a profit when they ‘buy low and sell high’. Bitcoin Futures offer an alternative way for traders to lock in their profits when the price of Bitcoin goes up or down.

A futures contract refers to an agreement to buy or sell a financial asset at a predetermined price and date. It is a derivative contract that follows the price movement of the underlying financial asset. A Bitcoin futures contract is a legal agreement where a trader agrees to buy or sell Bitcoin at a predetermined price in the future.

Crypto futures provide opportunities for high liquidity in the market. Moreover, as private entities offer these products, there are greater chances of regulation in futures financial instruments. Cryptocurrency futures also enable institutional-grade investments in the market.

How do Crypto Futures Work?

Bitcoin and crypto futures have increased in popularity significantly this year. TokenInsight reports that Q1 2020 saw a 314% increase in futures trading volume as compared to Q4 2019, reaching $2.10 trillion. The crypto futures trading volume witnessed a year-on-year increase of 165.56% in the second quarter of 2019. In Q3 2020, the digital assets derivatives market reported a 25.1% increase from the previous quarter reaching $2.7 trillion, as per this latest report.

There are two strategies that traders implement to profit from trading in crypto. By anticipating if the price of a cryptocurrency will rise or fall within a time duration, traders can choose to go long or go short and accordingly secure their profits.

For instance, one Bitcoin is trading at $16,000. A trader anticipates that within three months the price of Bitcoin will go down. With this purview, the trader decides to ‘go short’ and sell the Bitcoin futures contract at $16,000 i.e. the current price.

Close to the expiry date of the contract, the price of Bitcoin drops to $14,000. The trader now decides to buy back Bitcoin thereby making a profit of $2,000. By buying low and selling high, the trader made a profit whilst the price of the crypto asset was falling. Alternatively, if the price of Bitcoin goes up to $18,000 the trader incurs a loss of $2,000.

Why Trade Bitcoin Futures?

Investments and trades in Bitcoin are booming with retail and institutional investors joining the space. Bitcoin futures offer a lucrative opportunity to access the benefits of trading in cryptocurrency markets without some of the concerns faced in digital asset spot trading.

  • Market dynamics - With Bitcoin futures, an investor need not be concerned with storing private keys and managing them. Since it is a contractual agreement, traders can access the benefits of trading in Bitcoin and only concern themselves with market dynamics and prices.
  • Liquidity - Bitcoin futures add liquidity to the market and also present arbitrage opportunities. This also allows for greater exposure to digital assets from institutional investors.
  • Regulation - Institutional investors prefer to trade on regulated exchanges for any financial instrument. As cryptocurrency trading on exchanges is yet to be a completely regulated industry, crypto futures offer access to institutional investors for trading in digital assets in a regulated environment.
  • Mainstream adoption - Bitcoin futures also offer a gateway to mainstream adoption of cryptocurrencies by reducing volatility in prices, opening the cryptocurrency market to a wider investor base, and stabilizing the price of Bitcoin in the long term.

Crypto Futures Exchange Platforms

With the rising popularity of crypto futures, regulated marketplaces have emerged to provide users access to Bitcoin and cryptocurrency futures. Moreover, it is necessary to find a reliable third-party to facilitate trades in the derivatives market.

Some of the considerations while selecting an exchange platform for crypto derivatives trading include:

  • Regulated - As a futures agreement is basically a contract between a trader and the exchange, it is advisable to trade on a reliable and regulated platform.
  • Contracts - To access various instruments, a trader can check the range of contracts and assets available at the exchange platform.
  • Trading Features - Stop loss, take profits, and other trading features enable a trader to minimize their losses in any market conditions.
  • Leverage - Traders may also want to access the features of leveraged positions. Before selecting an exchange, perform due diligence on the features offered by the exchange platform.
  • Fees - A trader needs to check the process of deposits, withdrawals, trading fees, etc before selecting a platform for crypto futures trading.

Bottom Line

Crypto futures and their rising popularity signify that digital asset markets have matured. Moreover, such financial instruments present an opportunity for investors to take the benefits of investing in digital assets. The introduction of futures contracts in cryptocurrency will lead to mainstream adoption and stability of prices in cryptocurrency assets.