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What are Bitcoin Futures?
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TD Ameritrade is not responsible for the content or services this website. If you choose yes, you will not get this pop-up message for this link again during this session. Therefore, they have to use futures to protect themselves from getting into a situation where their costs overrun their income for a sustained period of time, which would lead them into insolvency.
Moving more into the domain of traders rather than producers, we find that short-selling is a popular use-case for futures contracts. If you wanted to short-sell Bitcoin, you would likely need to use a platform that supports Contracts for Difference CFDs. This is a fee that is charged on all CFD markets irrespective of the broker or asset class. It is charged for every day that you keep the position open. This means that short-selling Bitcoin via CFDs is only suitable for shorter-term trades.
How To Invest In Bitcoin Futures
With that being said, Bitcoin futures offer a more cost-effective way of shorting the digital currency when compared to CFDs. This is because you can keep the futures contract open for the full three months and only pay a settlement fee. As I explain in more detail later, top-rated Bitcoin futures provider Kraken charges just 0.
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This is very competitive. An additional characteristic of Bitcoin futures is that you can often access the market with a small amount of capital. This is because you can buy or sell Bitcoin futures on margin. For those unaware, margin allows you to trade with more than you have in your brokerage account. It acts as a security deposit, meaning that you can lose it in full if your trade goes against you by a certain amount. There is often a misconception that you need to hold onto a Bitcoin futures contract until it expires.
As long as you are trading American-style options, you can cash out your position at any given time. More on this shortly. Although I have already given you an overview of how Bitcoin futures work — alongside a simplified example, it is important to go a little bit more in depth about the specifics.
Once again, this is because futures are complex financial instruments, so it is absolutely crucial that you know what you are doing before parting with your money. First and foremost, you need to understand when the Bitcoin futures expire. In the traditional futures scene, contracts usually last for 3 months and are settled on the third Friday of the respective month. But, it is also possible to trade Bitcoin futures with a shorter duration of 1 week.
Additionally, I have also seen Bitcoin futures with a 6-month expiry. Furthermore, you can actually purchase a futures contract while it is still active. The strike price is the price of the futures contract set by the markets. In simple terms, this is the mid-point of the contract — meaning you need to determine whether the price of Bitcoin will finish higher or lower than this price.
The strike price will always be different from the current value of Bitcoin. It is important to note that the strike price itself is determined on a demand and supply basis. That is to say, the exchange hosting the Bitcoin futures market has no say in what the contracts are priced at. Once you know the contract expiry date and the strike price — you then need to determine whether you want to go long or short. To reiterate, going long means that you think the futures contract will expire at a higher price than the strike price.
And, going short means the opposite — meaning you think the price of Bitcoin will finish lower than the strike price. As I briefly noted earlier, American futures contracts are what you should focus on — as they allow you to exit your position at any given time.
How To Invest In Bitcoin Futures
Well, at any point between the time you buy the futures contract and the date in which they expire. Now, the value of your futures contract will change on a second-by-second basis. This is no different from buying Bitcoin in the traditional sense or trading it via CFDs. However, the value of the futures contract is based on what the markets believe the price will be at the point of expiry.
On the other hand, European futures contracts do not afford you the luxury of cashing out before they expire. Instead, your fate is only determined at the point of expiry. I would suggest avoiding European-style Bitcoin futures as there is no way for you to mitigate your risk. That is to say, your losses are virtually unlimited in the event that the trade goes against you by a considerable amount. This is where things start to get a bit complex.
The value of a Bitcoin futures contract is usually determined in BTC. The good news is that there are a small selection of platforms that are suitable for retail clients that wish to stake smaller amounts.
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This allows you to give Bitcoin futures trading a try without risking a consequential amount of money. There are several ways in which you can calculate your profits and losses when trading Bitcoin futures. By using the above calculations to quantify your profits and losses, the number of Bitcoin futures that you hold is somewhat irrelevant. After all, platforms like Kraken price the contracts in US dollars as opposed to BTC, which is far easier when it comes to assessing your potential gains. In a similar nature to CFDs, most Bitcoin futures markets allow you to trade on margin.
This allows you to stake a lot more than you have available in your brokerage account. In simple terms, this means that you can amplify your stake by 50x. In fact, applying this much leverage is super high-risk. This is because you always stand the chance of having your trade liquidated. This is when your trade goes against you by more than you put forward in margin. The only way to avoid this is to add more funds to your margin account.