How to Trade Bitcoin Futures

Bitcoin futures have become an increasingly popular way for investors to trade the cryptocurrency market. With the volatility of Bitcoin prices, futures contracts offer a way for traders to potentially profit from price movements without actually owning the underlying asset.

If you're interested in trading Bitcoin futures, you'll likely be dealing with contracts that are regulated by the Commodity Futures Trading Commission (CFTC) through the Chicago Mercantile Exchange (CME). The CME self-certified its BTC futures contract with the CFTC and it became effective on Dec. 18, 2017.

Whether you're a seasoned trader or a beginner in cryptocurrency trading, understanding how to trade Bitcoin futures can offer new opportunities for profit and risk. This guide breaks down the process of trading Bitcoin futures to help you get started in this dynamic market.

What Are Bitcoin Futures?

Bitcoin futures are financial contracts that allow investors to speculate on the future price of Bitcoin. These contracts enable investors to bet on the price movements of Bitcoin without actually owning the digital currency. In other words, since the futures are contracts that settle financially in cash, no BTC is involved. As in other futures contracts, you speculate on the price of bitcoin and not buying or selling the underlying cryptocurrency asset itself.

Also, no cryptocurrency trading platform or crypto wallet is required for futures contracts as they settle financially on the delivery date or traders reverse their positions. If the buyer or seller of a BTC futures contract holds the position and shows a profit on the delivery date, then the difference between the purchase price and the settlement price is paid out to the holder of the futures contract.

How to Trade Bitcoin Futures

Here's a step-by-step guide to help you get started with trading bitcoin futures:

1. Learn the Basics of Bitcoin Futures Trading

Futures contracts trade differently than stocks, funds and fixed income instruments, so if you’ve never traded futures, learn how they trade and the requirements for traders. Here are some important things to keep in mind:

• Bitcoin futures have high margin requirements at CME, with maintenance margin requirement of 37% and initial margin for hedgers at 100% of maintenance margin. Speculators have margin of 110% maintenance margin. An FCM, or futures commission merchant, may have higher margin requirements depending on the market and the trader.
• The CME bitcoin futures contract (BTC) specifications are for 5 bitcoin as defined by the CME Crypto Facilities Ltd. (CF) BTC Reference Rate (BRR). This aggregates activity in BTC trading across major bitcoin spot exchanges between 3 p.m. and 4 p.m. GMT.
• The minimum fluctuation for a futures contract is $25 per contract and $5 for calendar spreads.
• Trading times for bitcoin futures, which can be found on the CME, the CME Globex and the CME ClearPort trading platforms are from 5 p.m. until 4 p.m. CST, from Sunday through Friday. An hour of inactivity between 4 p.m. and 5 p.m. gives a clear opening and closing quote for the contracts, unlike bitcoin itself, which trades 24/7.  
• The listing cycle for the BTC futures contract is the March quarterly cycle, consisting of March, June, September and December, plus the nearest two serial months not in the March quarterly cycle.
• Serial months are months in which a futures trade can be made that isn’t in the quarterly cycle. The last day of trading is the last Friday of the contract month. Trading in futures set to expire terminates at 4 p.m. GMT when that Friday comes around.

Other considerations consist of how closely the futures prices track the spot price, the liquidity in the market and how other traders and market makers are positioned.

2. Choose a Futures Exchange and Broker

To trade Bitcoin futures, you'll need to use a futures exchange that offers these contracts. Some of the most popular exchanges for trading Bitcoin futures include the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).

How to trade bitcoin futures is just as important as where you trade, so make sure you pick the right broker. A reputable futures broker is usually a member of the National Futures Association (NFA) and submit to regulatory oversight by the CFTC.

To start trading futures, you must first open an account with a registered futures broker where your account can be maintained and your trades guaranteed. Futures brokers are generally known as either FCMs or introducing brokers (IBs).

Here are Benzinga’s picks for the best future brokers for bitcoin futures:

3. Build a Trade Plan

Developing and implementing a trading plan could be the most important thing you do to further your trading career. Base your trading plan on careful analysis of the market you plan to trade in.

As you build your trading plan, consider what your objectives are for each trade, the amount of risk you plan to take on a trade and how much risk is acceptable for each trade. Other factors include the technical and fundamental analysis indicators you plan to use to generate buy and sell signals, the types of orders you plan to use and the way you plan to monitor the market and price developments.

Money management and position sizing must also be considered when trading in the volatile bitcoin futures market. If you have difficulty developing your own plan, you can either follow what other traders do or use someone else’s trading plan.

4. Practice with a Demo Account

Ideally, the broker you select should provide you with a virtual or demo account where you can test your trading plan and get a feel for trading in real time. You really don’t know how to trade bitcoin futures until you put your plan to the test. Trading in a demo account or trading simulator allows you to practice without committing any funds and address any issues that may have arisen with your trading plan.

Once you’ve developed sufficient confidence in your methods, you can then fund your trading account and begin to trade. Making small trades at the beginning could save you a lot of money and stress. After you’ve built up your account with small trades, you can increase your position size with more confidence.

A broker’s demo account will also give you insight into the broker’s services, which could help you in your final selection of a broker. If you have a trading plan, you can open several demo accounts and test your plan with different brokers.

5. Go Live and Start Trading Bitcoin Futures

Once you’ve selected a broker and have tested it in a demo account, add funds to your account and start trading bitcoin futures in a live account. Keep in mind that putting real money on the line may make a difference to the way you trade, so make sure you take that into consideration when you begin trading.

Trading futures may be more capital intensive and require significantly more money than trading spot currencies, so make sure you have enough trading capital to meet margin requirements.

What Are the Benefits of Trading Bitcoin Futures?

Trading Bitcoin futures offers a range of benefits for investors looking to tap into the potential of the cryptocurrency market. Here are some of the advantages:

• Speculation on price movements: Trading Bitcoin futures allows traders to speculate on the price movements of Bitcoin without actually owning the asset, potentially profiting from both rising and falling prices.
• Leverage and margin trading: Bitcoin futures trading allows traders to trade on margin, borrowing funds to increase position size for amplified profits and losses. Experienced traders can utilize leverage to maximize returns.
• Risk management: It gives you the opportunity to use risk management strategies like stop-loss orders and hedging with futures contracts to protect investments and limit potential losses from price fluctuations.
• Liquidity and market access: Bitcoin futures trading occurs on regulated exchanges, offering traders a liquid market with transparent pricing. It allows easy entry and exit of positions without the need for a counterparty, and investors can access the cryptocurrency market without holding physical Bitcoin.
• Diversification: This provides a way for investors to diversify their portfolios and gain exposure to the cryptocurrency market without investing directly in Bitcoin, allowing for risk spreading and potentially reducing overall portfolio volatility.

What Are the Risks of Trading Bitcoin Futures?

While trading Bitcoin futures can provide opportunities for profit, it is important for investors to be aware of the risks involved.

• Price volatility: Bitcoin is known for its price volatility, and this volatility is often magnified in futures trading. Prices can fluctuate dramatically in a short period of time, leading to significant gains or losses for investors.
• Leverage: Bitcoin futures allow traders to control a larger position with less capital through margin trading, but this also increases the risk of potential losses and margin calls if the market moves against them.
• Regulatory risks: Bitcoin futures are still a relatively new financial product and are subject to regulatory scrutiny. Changes in regulations or government intervention could impact the trading of Bitcoin futures and the overall market sentiment towards cryptocurrencies.
• Counterparty risk: When trading Bitcoin futures, investors face counterparty risk, where the other party in the trade may not fulfill their obligations, leading to financial loss.
• Market manipulation: The cryptocurrency market is vulnerable to manipulation, including pump-and-dump schemes and price manipulation by whales, which can also occur in the futures market.
• Liquidity risk: Bitcoin futures markets may lack liquidity, making it difficult for investors to find buyers or sellers at desired prices, affecting their profitability.

Is Crypto Futures Trading Profitable?

Crypto futures trading can be profitable for skilled traders who can accurately predict market movements and manage risk effectively. However, it is also highly risky and volatile, with the potential for significant losses. Due to the extreme fluctuations in cryptocurrency prices, futures trading can result in both substantial gains and devastating losses within a short period of time. It requires deep knowledge of the market, technical analysis skills, and a strong emotional discipline to be consistently profitable in crypto futures trading. As such, while some traders may find success and profitability in this space, it is important to approach it with caution and only invest what you can afford to lose.

Get Started Trading Bitcoin Futures

Trading Bitcoin futures can be a lucrative opportunity for investors looking to profit from the price movements of Bitcoin. However, it is a speculative activity that comes with inherent risks. By understanding the market, implementing risk management strategies, and choosing a reputable exchange, investors can potentially profit from the price movements of Bitcoin.