You might be a successful crypto gambler on the best crypto casino, but that doesn’t mean you should stop learning. When it comes to the world of cryptocurrency, there is always something new to explore, and today, it’s Bitcoin Futures.
This article will explore what bitcoin futures are and how to invest in them. We will finish off by considering some of the advantages of futures contracts before we encounter a friendly word of caution to newcomers.
What Are Bitcoin Futures?
We should first have a look at how ordinary futures contracts work before applying them to bitcoin.
Ordinary Futures Trading
Experts define a futures contract as a legal agreement between two parties that specifies when a buyer should buy or when a seller should sell an asset in the future at a predetermined price and quantity.
The buyer provides the initial capital for the investment and receives the underlying asset when the agreement expires.
On the other hand, the seller must ensure that the buyer is provided with the underlying asset when the agreement expires.
Many people like futures contracts because they allow investors to hedge price movements on the underlying asset, which buffers them against losses resulting from unfavorable price swings.
Bitcoin Futures Trading
So, let’s apply the same system in the context of bitcoin. Chances are, you’re afraid of losses incurred due to unfavorable price swings, and a buffer sounds like a smart move.
You wouldn’t be wrong. Bitcoin is a famously volatile asset. Just consider March 2020, as the covid-19 pandemic raged worldwide and caused bitcoin prices to plummet by about 50% in a handful of days.
Then in September 2020, the opposite happened. Bitcoin prices went from around $4,000 up to approximately $12,000 before once again crashing to below $10,000.
If you practice spot trading, which is the straightforward purchasing and selling of bitcoin, you must buy or sell your crypto assets at their current market price.
Crypto traders certainly had a time of it in 2020 with all those ups and downs, and the pandemic isn’t the only thing to hugely influence prices. While this might be a rush for some, others might want to take a more careful approach.
This is where futures trading comes in at a predetermined time, quantity, and price. Consider the 2020 scenario in a futures contract setup:
- In mid-March, you enter into a contract stipulating that you will buy 1 BTC @ $4,000 on September 20.
- Alternatively, you could be the seller in the agreement, and you will have to sell 1 BTC for that same amount on the specified date.
- As the buyer, you’ve lucked out because, in September, you will purchase 1 BTC for far below its market value.
- As the seller, you haven’t gotten lucky this time because you would want the price to drop so that you could get more for your crypto asset than its market value.
With Bitcoin futures, you don’t have to hold onto the volatile asset yourself. You are simply trading based on its value and earning profit in the form of physical currency.
This is beneficial for traders who don’t want to create a bitcoin wallet or those without the software and technological know-how to invest in cryptos themselves but still want in on the profits!
These kinds of contracts are not usually held until the point of expiration. Instead, the contracts themselves get traded just like any other asset. The value of these contracts varies as the value of Bitcoin rises and falls.
So you can see that, provided you get your timing right, bitcoin futures can be a very lucrative approach to taking advantage of bitcoin profits.
How To Invest In Bitcoin Futures
Futures Trading Platforms
You can trade Bitcoin futures on various platforms. Here, we will briefly explore some of the most popular:
- OKEx: The site claims to sell BTC futures totaling up to $1.5 billion per day. Pros: one of the most liquid exchanges, good trading pairs variety, both spot and bitcoin futures exchange. Cons: a confusing interface at times.
- Binance: Binance is the leading bitcoin futures trading platform. Pros: lowest trading fees, the best volume and liquidity, 125x leverage on crypto futures. Cons: Tether (USDT) is the only trading pair.
- ByBit: A highly regarded trading platform that offers up to 100x leverage and specializes in perpetual contracts. Pros: new users can receive up to $90 of user benefit. It is a clean mobile trading app, boasts deep liquidity and volume. Cons: lacks a wide range of trading pairs.
- FTX: this platform is rapidly growing in popularity as a futures exchange platform. Pros: offers 100x perpetual futures contracts, trades in all DeFi tokens, low fees & easy interface, clean mobile app for iOS and Android. Cons: leveraged tokens are a risky bet for newbies!
Exiting A Futures Contract
Part of how you make money trading in futures contracts is by exiting at the right moment. There are three main ways to exit your futures position.
- Offsetting: this is the most common way traders make an exit. It involves creating another futures contract of the same size and value, which effectively balances out the trader’s previous obligations.
- Rolling: this process is the same as offsetting, but the new contract has an expiry date further in the future than that stipulated in the initial contract.
- Expiry: This is when the contract is seen through to its expiry date, and both parties must buy/sell at the specified price.
Hedging a Futures Contract
This is how traders can use futures contracts to reduce investment risks:
- Imagine you buy 3 BTC at $15,000 each, and you suspect that prices are due to go up towards month-end.
- To hedge your bets, you enter into a futures contract that stipulates that you will sell 1 BTC for $15,000 at the end of the month.
- In scenario one, you correctly predicted a price rise, and you can sell your other two BTCs and make a profit. Unfortunately, it isn’t as large a profit as you would have made selling three, but it will be a decent profit nonetheless.
- In scenario two, prices unexpectedly drop. Here, you are still operating at a loss, but you have a cushion of $15,000 from the one BTC you sold.
So, in summation, hedging reduces potential profit. But more importantly, it reduces overall risk, which is always a good thing for those risk-averse traders among us!
This is when you leverage on a bitcoin future, and you only require a percentage of the total value to participate in the futures contract.
Many platforms offer a futures leveraging feature, but remember, leveraging can increase your rewards but also any losses!
Shorting Crypto Futures
Shorting takes advantage of price drops in the market value of an asset. You can apply the very same methodology to BTC futures, where investors continually repurchase futures at the right moments, turning a profit.
BTC Future’s Trading Advantages
- You can go long or short: both long and short trading is possible with futures contracts. You just need to base your decision on the direction the market is predicted to move in.
- There are no day trading limits: you can buy and sell futures as many times a day as you want and maximize daily profits should you play your cards right.
- Around the clock trades: futures are traded 24hrs a day, with the exception of weekends.
- Tax advantages: these are generated because most of the gains from futures are classified by the taxman as long-term, even if you hold the profit for only a few seconds!
A Word of Caution
This article is entitled a “beginners guide,” but generally speaking, you need a lot of veteran knowledge to trade in futures contracts successfully.
While there is no harm in learning, it is essential to understand that futures trading is not for the crypto newcomer. You are entering into a legal, binding contract that might require you to pay in more money than you make at the end of the day.
Essentially, you can stand to lose a lot of money with this particular trading style. For that reason, make sure you fully understand how the market behaves before you give it a go, and when you first start, start small!
So, now you know what bitcoin futures entail, where you can start trading in them, and some of the trading approaches you can take.
You can take big risks (with big rewards) such as leveraging or shorting futures. Or you can minimize losses through hedge trading.
There are many advantages associated with futures trading but be warned – it is not for the crypto rookies out there!
In the meantime, keep on learning through with our blog, and keep make smart decisions by seeking out advice from professionals.