Table of Contents
- What Are Bitcoin Futures?
- How Bitcoin Futures Work
- Bitcoin Futures Contract Details
- Bitcoin Futures Trading Strategies
- Advantages and Disadvantages
If you want to speculate on the price movement of Bitcoin, there are a number of ways to do it.
One way you may not have considered is to trade Bitcoin futures.
Cryptocurrencies are volatile, which means speculators can profit from these volatile prices
movements in the futures market.
What Are Bitcoin Futures?
Bitcoin futures are like other futures. You can speculate on the price movement and profit if you
are correct. Most speculators take cash settlements, which is good because at this time, The
Chicago Mercantile Exchange (CME) and Intercontinental Exchange (ICE) only offer cash
settlements for Bitcoin futures contracts.
Since trading on ICE and the Chicago Mercantile Exchange is cash-settled, there is no need for
traders to have Bitcoin Wallets.
How Bitcoin Futures Work
Bitcoin futures work just like other futures contracts. You have a choice of taking a long position
or a short position, or you can take both sides. Buying a contract is considered a long position.
Selling a contract is considered taking a short position.
A long position is a bet that the price of Bitcoin is going to rise in price by the time the futures
contract expires. An example of a long Bitcoin futures trade would be:
You buy a Bitcoin futures contract at $100,000 on June 1st. By July 1st, if the spot price
jumped to $105,000, you could sell the futures contract for a profit of $5,000. But, if the
spot price dropped to $95,000, you would see a loss of $5,000.
A short position is a bet that the price of Bitcoin is going to decline by the time the contract
expires. An example of a short position would be just the opposite of the above:
On June 1st, you could sell (also called “shorting) a Bitcoin futures contract for
$100,000. By July 1st, if the price of Bitcoin drops to $95,000, you would end the
contract for a cash profit of $5,000. If the price of Bitcoin had risen to $105,000, you
would have had a $5,000 loss.
You can exit the trade at any time up until the expiration date of the futures contract. So if you
saw good profits before the expiration date, you could sell it and get out of the contract.
If you were in a losing position and wanted to get out before losses become too high, you would
sell the contract before expiration. It is always good to have an exit strategy when a trade goes
against your original thinking.
Bitcoin Futures Contract Details
According to the Chicago Mercantile Exchange, one contract unit is 5 bitcoin. The CME has
monthly contracts that are listed for 6 consecutive months with 2 additional December contract
You can trade Bitcoin futures contracts at different brokerage firms like E-Trade, Ameritrade,
Charles Schwab, and many others. As with all futures trading, you will need a margin account.
Bitcoin Futures Trading Strategies
There are numerous strategies in futures trading, some simple and some quite complicated.
Four basic trading strategies are:
- Go long: Buy futures contracts. This is when you expect the price of Bitcoin to rise
before the expiration date or want to hold it long term and keep “rolling over” (extending)
- Go short: Short-sell futures contracts. This is when you expect the price of Bitcoin to fall
in price, typically, before the expiration date.
- Bull calendar spread.
- Bear calendar spread.
A calendar spread is when you buy and sell Bitcoin futures contracts with different expiration
dates. A calendar spread can reduce the risk of a position.
With a bull calendar spread, you will buy the shorter-term contract and short the further out
expiration date contract. When entering this strategy, you believe that the long contract will
move up more than the short contract. You want this spread to widen.
A bear calendar spread is when you sell the shorter-term contract and buy the longer-term
The bear calendar spread gives you several ways to profit since this type of spread
can widen in a few ways:
- The long contract goes down while the short contract goes up
- The long contract goes down more than the short contract goes down
- The long contract goes up less than the short contract does.
This should be used when you expect a short contract to increase more than the long
contract. This widens the value of the spread.
Advantages and Disadvantages
The advantages of futures trading include:
- You can profit in a rising or a falling market
- You can leverage your trading
- You can hedge your holdings against a bear market instead of selling your bitcoins.
The disadvantages include:
- Futures are a high-risk form of trading
- Even though volatility can be great for futures trading, it sometimes makes determining
the market direction hard
- Leveraging has associated fees
- A sudden and unexpected long or short squeeze can wipe out your position.
Trading Bitcoins futures gives you the ability to participate in the volatile cryptocurrency market
and profit. If you own a considerable amount of Bitcoin and would rather not have to sell them,
the Bitcoin futures market allows you to hedge your holdings in a bear market.
Futures trading is not for the novice market trader. Before trading in Bitcoin futures, you should
fully understand the cryptocurrency market, what makes Bitcoin move up and down in price, and
futures trading generally.