The first bitcoin futures landed on the crypto trading scene on December 10, 2017.
These futures, made available by the Chicago Board Options Exchange, are no longer tradable.
On December 17 that same year, the Chicago Mercantile Exchange launched its bitcoin futures.
The goal of these cash-settled products had been made clear in November 2017.
According to the CME’s Leo Melamed, cash-settled futures would “tame” bitcoin. “We’ll tame it into a regular type instrument of trade with rules.” – said Melamed in an interview with Reuters.
In this article, we will take a look at:
- What futures are and how they managed to “tame” bitcoin.
- How to trade futures. More precisely, how to trade bitcoin and cryptocurrency futures.
- Where you should trade these speculative derivatives.
What Are Bitcoin Futures? How Do They Work?
A bitcoin futures contract enables its owner to buy bitcoin for a set price, at a specified point in the future.
At the time of writing, the price of one bitcoin is around $7.2k. You are a bull and believe the price will go up to $10k by the end of the year. It thus makes perfect sense to you to enter a futures contract, that would compel the other party to sell you bitcoin for $8k at that time.
At the end of the year, you may choose to buy the specified amount of bitcoin for $8k/BTC. If cash-settled, the contract allows you to pocket the difference between the price and the price agreed in the contract.
When you trade cash-settled futures, you do not handle (buy/sell/hold) any bitcoin at all.
If you believe the price will drop to $5k, you can enter a futures contract in that direction instead. Such a contract would give you the right to sell bitcoin for $6k at that time.
How to Trade Futures
With futures contracts, you can go Long or Short.
- When you believe that the price of an asset will go up, you enter a contract that reflects your bullish stance. You go Long. This contract allows you to Buy bitcoin in the future, at a predetermined price.
- If you assume the price will drop, you go Short. You enter a contract that will allow you to Sell bitcoin in the future.
Knowing how to trade futures is undoubtedly useful. You should also know why to trade them. What advantages do they offer over simply buying, holding, and selling digital assets?
- The value swings of futures are much more significant than those of the underlying asset. You may also be able to use leverage to increase risk/profitability.
- Bitcoin futures allow you to make money on bitcoin price downswings.
Where to Trade Bitcoin Futures
Knowing where to trade is just as important as knowing how to trade futures. It’s important to find a trustworthy exchange with good security and an intuitive, easy-to-use interface. Just as important is making sure that your trading profits aren’t all eaten up by fees. Do a little research before you begin trading to make sure you’ve chosen a platform that will work well for you.