Cryptocurrency futures allow you to trade digital assets without taking ownership of the underlying tokens. This comes with several benefits – such as not needing to worry about wallet storage, low fees, and the ability to open a long or short position. In most cases, you can also trade cryptocurrency futures with leverage.
In this guide, we explain how cryptocurrency futures work and which online trading platforms allow you to access this speculative marketplace.
What are Cryptocurrency Futures?
In a more detailed explanation, cryptocurrency futures allow you to trade popular digital assets like Bitcoin and Ethereum without having to own the underlying tokens. You will be trading a financial derivative rather than the actual cryptocurrency itself.
It’s also important to know that cryptocurrency futures are generally restricted to institutional investors – since they’re complicated financial instruments that frequently need a substantial minimum deposit. However, as we’ll see in a moment, there are several methods for retail customers to participate in cryptocurrency futures markets from the comfort of their own homes.
However, cryptocurrency futures provide you a lot more options when it comes to speculating on the future value of the underlying asset.
- You have the option of going long or short – meaning you can attempt to profit from both rising and falling prices.
- Furthermore, most cryptocurrency futures platforms allow you to leverage your position – meaning you may trade with more money than is available in your account.
- Contracts in the traditional futures market will expire at some point, usually every three months. This implies that your position will be closed and you will be required by law to take possession of the underlying asset, such as gold, oil, or wheat. Many platforms offer perpetual-style contracts in the cryptocurrency futures market, which means they never terminate.
- Perhaps the most important thing is you don’t need as much money as some other markets – which allows retail investors with limited funds an opportunity to take larger trades.
The easiest approach to get into the cryptocurrency futures market as a retail customer is through a CFD (contract-for-difference) — we’ll deeper discuss this later.
How do Cryptocurrency Futures Work?
If you’re totally new to cryptocurrency futures, it’s crucial that you conduct some prep work before risking any money. After all, not only will you be trading speculative and volatile asset classes like digital currencies, but futures themselves are highly sophisticated financial products.
The cryptocurrency futures contract is a legal agreement between two parties to exchange an underlying asset at a predetermined price on a set date. The person who buys the contract agrees that they will take delivery of the commodity, currency or instrument – whether it’s Bitcoin (BTC), Ether (ETH) or even Apple shares. It’s important to note that some exchanges don’t offer fiat-cryptocurrency pairs for trading and only work with crypto-to-crypto trading.
In most cases this means you can deposit your BTC into one platform and trade against ETH/USD for example – but not necessarily get cash in return if you would like to withdraw from the position.
That being said, the sections below will go over everything there is to know about cryptocurrency futures – including the following essential topics:
- Contract Size
- Contract Duration and Expiry
- Long or Short
Cryptocurrency Futures Market
The first thing to assess when learning how to trade cryptocurrency futures is the specific market that the contract relates to. In the vast majority of cases, you will be trading BTC/USD – which is the most liquid cryptocurrency pair in this industry.
To put it another way, you’ll be betting on the price of Bitcoin versus the US dollar. To put it another way, if the BTC/USD futures contract is trading at $42,000, your job is to determine whether the price will rise or fall.
That being said, there are a few additional cryptocurrency futures markets – such as ETH/USD and ADA/USD etc. You may discover that liquidity levels and trading volumes are lower, resulting in wider spreads and higher fees. As a result, if you will be using cryptocurrency futures for the first time, it might be preferable to trade BTC/USD.
This is one of the most common reasons for traders to fail in their attempts to trade crypto futures. The reason for this is that, in the traditional futures market – the minimum contract size is usually rather large. This refers to how many assets you need to purchase or sell for each contract traded.
The world’s most significant regulated Bitcoin futures market is CME Group, which uses a contract specification of 5 BTC.
In a nutshell, this implies that for each futures contract you buy or sell, you must commit 5 Bitcoin; which when calculated using today’s $55,000 prices amounts to a total outlay of over $275,000.
It’s easy to assume that most of you are reading this book are not interested in risking $275,000 on a cryptocurrency futures position. Fortunately, there are ways around it; some exchanges provide cryptocurrency futures with a very low minimum contract size.
Contract Duration and Expiry
The length of time for which the contract is in effect and when it will expire are two more things to consider when learning how to trade cryptocurrency futures. As previously stated, regular futures contracts have an expiration date, which usually lasts three months.
In the example of a commodity like natural gas, the futures contract on this market might expire on December 3, March 3, June 3, and September 3. Regardless of when your cryptocurrency futures contract expires – if you’re still holding it at your chosen broker or exchange, it’ll be closed automatically.
This is when things start to get interesting. In the traditional Bitcoin futures market, some providers will settle the contract in digital currency. This implies that if you have a long position on BTC/USD and hold the contract until it expires – you’ll have to take ownership of the Bitcoin. As a casual trader, this is something you don’t want to worry about. Once again, as with all our services, CFDs provide an advantage over regular futures trading: because the contract never expires.
You can also find ‘perpetual’ futures contracts on exchanges like Binance and OKEx. Despite the fact that these cryptocurrency futures are offered by non-licensed providers, they do not have an expiration date.
Long or Short?
One of the most significant advantages of trading cryptocurrency futures is that you will always have the option of going long or short. In essence, this gives you the chance to profit from both rising and declining market rates.
- If you believe the cryptocurrency future contract will be worth less at expiration, you would go short.
- If you believe the contract will be more valuable when it is completed, then you’ll go long.
This opens up a lot of options. For example, if you believe that the broader digital asset markets are going to have a bearish trend, you may profit from this by going short on a cryptocurrency futures contract.
If you’re aware of trading BTC/USD or ETH/BTC, long and short futures positions should be simple to comprehend. It’s simply the same as buying low and selling high, only instead of hanging on until you reach your objective price – we close out early at a loss or profit.
A Long Position is a bullish investment (buy low sell high). In this example, it means you own some cryptocurrency like Bitcoin that has appreciated in value over time. To profit from the price increase without having to hold any coins for months or even years – You can buy a contract for difference (CFD) from companies like FTX or Huobi. This allows us to acquire crypto currency at a much lower cost than if we were to purchase the actual assets.
In addition to being able to go long or short, cryptocurrency futures provide leverage. This means you may trade bitcoin futures and place a position worth more than your entire account balance. The amount of leverage available will be determined by a number of criteria, including:
- Whether or not you are using a regulated exchange
- Your home country
- Whether you are a retail client or professional trader
- The cryptocurrency futures market you’re trading in
To put it another way, to give you an idea of the degree, unlicensed exchanges like Kraken may provide Bitcoin futures marketplaces with a leverage of up to 1:50 (50x). This simply implies that if you opened a position worth $10,000 on an unregulated exchange, you’d only need to fund it for $200.
This may appear to be a straightforward way to generate money, but if the cryptocurrency futures position moves against you by a certain margin, the exchange would have to terminate your trade. This implies that the exchange will keep your stake at $200 in this scenario.