What Are Bitcoin Futures? How Do They Work?

By | January 8, 2024

Spot trading—the practice of buying and selling Bitcoin—forces traders to exchange cryptocurrencies at their current prices. But what if there was a way to lock in that price of $4,000, picking up the Bitcoin a couple of months later? So even if Bitcoin’s price hit $12,000, the counterparty would have to deliver the Bitcoin purchase with $4,000. Bitcoin futures were the first major institutional development concerning the offering of Bitcoin trading within regulated exchanges. Since then, numerous developments have unfolded regarding Bitcoin’s status as an asset as well as the potential offering of Bitcoin ETFs.

  1. Since futures contracts are believed to closely follow spot prices, you’re probably wondering why these differences occur.
  2. The value of and interest in this cryptocurrency has exploded exponentially.
  3. So, starting with the ProShares Bitcoin Strategy ETF (BITO) in October 2021, 13 futures-based bitcoin ETFs were created.
  4. Binance has opened U.S. subsidiaries only recently, but its U.S. offerings are limited.

That compares with expense ratios of about 0.26% for most of the new crop of spot ETF competitors. Several platforms are already offering futures trading for the legacy cryptocurrency, and the launch of Bakkt is seen as a significant step forward for Bitcoin futures trading among institutional investors. The steps to conduct trade in Bitcoin futures are the same as those for a regular futures contract. You begin by setting up an account with the brokerage or exchange where you plan to trade. Once your account is approved, you will need another approval from the trading service provider to start futures trading.

Most Exchanges Are Unregulated

Bitcoin futures contracts at CME are regulated by the Commodity Futures Trading Commission (CFTC). This happens because market participants perceive and include the possible impacts of volatility. If there are only two days to expiry, the futures price calculation formula simply tells us that the price of the Bitcoin futures contract will remain very close to its spot price because of the time remaining. As much as bitcoin futures ease the process of making money on the market, it’s not so accessible to everyone.

What does it mean to buy a bitcoin futures contract?

Doing that, however, is not exactly easy, so one might argue that Bitcoin futures are not very accessible for the average person. As the chart below demonstrates, BITO has trailed its benchmark, the Bloomberg Galaxy Bitcoin Index, since inception by eight percentage points through January 30. Note that there is a difference between the cumulative and spot price returns because the cumulative return includes additional factors such as dividend payments and interest on the fund’s cash.

The SEC has yet to approve a Bitcoin spot ETF that invests in the cryptocurrency directly for listing on a major U.S. exchange. In particular, the SEC has denied several applications for Bitcoin ETFs already, citing that Bitcoin futures markets are not mature or liquid enough to support Bitcoin financial modeling for equity research ETFs. Moreover, the SEC recently postponed a decision on one of the leading ETF proposals — from VanEck & SolidX — until February. The amount you can trade depends on the margin amount available to you. Margin is the minimum collateral you must have in your account to execute trades.

Bitcoin futures: a note of caution

So, you just have to understand the benefits and risks and choose the best strategy for you if you really want to explore this space. These regulations introduce a guide that controls the contract and allows both speculators and investors in the futures contracts to comply. The rules are crystal clear, and the consequences of breaking the rules are well presented in advance.

What to Consider When Trading Cryptocurrency Futures

Instead, it simply involves trading Bitcoin at a future, pre-agreed upon date, whatever the price at that time may be. Understanding the market might not be the most accessible task, but you don’t even need an ounce of technology to get involved, not even a Bitcoin wallet. Another factor keeping investors in ProShares’ higher cost fund could be taxes, specifically in comparison to the capital-gains taxes that for some BITO holders with large paper profits. They can be used as a tool for the speculation on the price of financial assets as well.

It turns out that futures-based commodity ETFs make more sense for some assets than others. “The trouble is when you’ve got spot you need to warehouse it in big tanks, says McNeil. ”There’s a cost to carry when you store the physical product.” However, he noted that spot gold ETFs don’t present the same challenges. Thanks to its strong launch ProShares’ BITO has a 90% market share among bitcoin futures funds.

While partners may reward the company with commissions for placements in articles, these commissions do not influence the unbiased, honest, and helpful content creation process. Any action taken by the reader based on this information is strictly at their own risk. Please note that our Terms and Conditions, Privacy Policy, and Disclaimers have been updated. A good ETF offers you access to gain exposure to bitcoin within your budget, risk tolerance, and trading goals. When a bitcoin contract expires, a process known as settlement begins.

However, these two have distinct features, and you must clearly understand them before putting your money on them. Spot trading only offers you fundamental trade orders like buying low and selling high, and you tend to make a profit during the market pump. On the other hand, trading bitcoin futures offers many benefits, including trading and accessing leverage during bull and bear markets. Cryptocurrency futures are contracts based on underlying cryptocurrency prices that allow traders access to price fluctuations without taking possession of cryptocurrencies.

They give investors exposure the same way they would to a commodity without the need to hold the underlying cryptocurrency. As such, Bitcoin futures https://www.topforexnews.org/books/forex-trading-strategy-56/ contracts also offer risk mitigation and hedging possibilities. If you’re interested in learning more about these contracts, keep reading.

Because it was traded on a decentralized exchange, authorities thought this digital currency would lead to illegal transactions, money laundering, and even terrorist financing. Bitcoin futures ETF charges money on futures trades, maker and taker fees, and more. Taking on a contract is a serious obligation, and if it reaches its expiry date, the trader has a legal obligation to fulfill it.

For a better understanding, say there is a farmer who would like to sell a large volume of corn at the next harvest. Although the corn is not produced yet, the farmer wants to ensure that a proper price is paid for the corn in the future. Then there is a buyer who is looking for corn from the next crop, who will be willing to pay the current market price for https://www.day-trading.info/financial-spread-betting-companies-top-10-brokers/ it or something similar. In this case, the seller and the buyer can form a futures contract at a specific price. This will protect both the seller and the buyer against volatile price movements. Cryptocurrency options work like standard options contracts because they are a right, not an obligation, to buy cryptocurrency at a set price on a future date.

ProShares is targeting traders seeking financial leverage as a differentiator from spot ETFs, which don’t use leverage to magnify returns. In the second case, futures contracts are used as a hedge against adverse price movements that would affect an entity that actively uses or produces the underlying asset in the contract. Depending on Bitcoin’s price fluctuations, you can either hold onto the futures contracts or sell them to another party. At the end of your contracts’ duration, you have the option to roll them over to new ones or let them expire and collect the cash settlement due. The first Bitcoin futures contracts were listed on the Chicago Board Options Exchange (CBOE) in early December 2017 but soon discontinued them. The CME also introduced Bitcoin futures contracts in December 2017.

Bitcoin futures are futures contracts that speculate on the price of Bitcoin without participants actually having to own Bitcoin. In 2017, bitcoin remarkably recorded a game-changing experience when it moved from lows of $5,000 to about $19,000. At this point, many real-world projects, including futures, were conceptualized into bitcoin trading. Bitcoin futures was introduced into the crypto world in 2017 and has since been offering people new ways to invest in crypto. Because each Bitcoin futures contract represents 5 BTC, there is inherent leverage in the Bitcoin futures market.

Leave a Reply

Your email address will not be published. Required fields are marked *