After the introduction of digital currencies, derivatives such as crypto futures have arguably become one of the most exciting trading tools. They've encouraged an additional interest in the cryptocurrency space by enabling speculative visibility, expanding its wide appeal and propagating uptake. But what are they all about? And should you trade in the ‘regular’ (spot) market? Or should Bitcoin futures, or even broader crypto futures, be your thing?
First off - cryptocurrency futures are a type of contract that can be considered as agreements between two entities to trade a crypto asset at a specified price on a fixed date. Naturally, a Bitcoin futures contract therefore involves trading Bitcoin.
What is Bitcoin Future and How it works
Bitcoin futures enable stakeholders to invest in the Bitcoin market without owning the actual cryptocurrency. Bitcoin futures, like asset or stock index futures, enable investors to bet on the Future price of the Bitcoin. Bitcoin futures came on to the mainstream when on December 10, 2017, the Chicago Board Options Exchange (CBOE) launched the first Bitcoin contract. In December 18, 2017, the CME launched its Bitcoin futures exchange.
But it is the top crypto derivatives exchanges - like C-Trade - that have helped pioneer interest in the space and led to its broad adoption. Crypto traders are increasingly trading Bitcoin futures over the Bitcoin spot market, and here’s why.
What are the Benefits and Risks of Bitcoin Futures
Bitcoin futures trading involves a ‘margin’ and ‘leverage’. Margin is a method of using a small amount of the total transaction value to take a position - the rest, is borrowed. Leverage is a means to calculate the impact of your borrowed amount.
For example, let’s say that the margin for a Bitcoin futures trade is 10%. So if a Bitcoin is trading at $60,000, a futures trader could take a 1 BTC futures contract for just $6000.
The trader can take this position either ‘long’ or ‘short’.
- A long position holder is a buyer , where they gain if there’s a price increase.
- A short position holder is a seller, where they gain when the price drops.
Being able to trade Bitcoin futures rather than the underlying cryptocurrency has many advantages:
- For starters, it enables risk management (hedging). This means that if an investor is holding Bitcoin, they can trade Bitcoin futures to reduce their risk if the price of Bitcoin fluctuates in the future.
- It also allows a trader to speculate on Bitcoin’s future price. If they are confident about the price of Bitcoin in the future, they can take a buy or sell position in the present.
- No actual exchange of Bitcoin occurs in a futures contract. These are all ‘cash-settled’ i.e the net profit or loss is exchanged between traders.
With Bitcoin's high levels of price uncertainty, investing in Bitcoin futures allows one to forecast big gains or losses and develop Bitcoin trading strategies accordingly and that cannot be said for Bitcoin spot trading. If one wants to make money trading futures, one will need a solid understanding of market cycles and volatility.
The financial sector's interest of Bitcoin futures has had a huge impact on the crypto market. These one-of-a-kind financial instruments allow smart investors to profit from Bitcoin's uncertainty without actually owning the cryptocurrency. This circumstance is perfect for major investment companies and others who choose to stay away from unregulated markets like cryptocurrencies.
It's important to note that futures aren't a safe bet. It's possible that the price will fall and the investor will be left with an outrageously expensive Future.
Differences between Bitcoin and Bitcoin Futures
- Bitcoin futures are currently based on a price index that measures the price of Bitcoin. Bitcoin Future has no role in the purchase or sale of Bitcoin. The payment for Bitcoin Futures is made in cash rather than Bitcoin.
- The price of Bitcoin Futures frequently differs from the spot price in the markets of an exchange platform. When it comes to Bitcoin Futures Trading, every exchange platform turns up with a "fair price." This fair price has been used to decide if the trading margin should be shifted to the seller or the buyer, and it is calculated using spot exchange average prices.
- In a Bitcoin spot exchange, the crypto exchange site charges a trading fee at the time of the transaction, after which the trader can keep their Bitcoin for as long as they like without incurring any extra costs. A long-term investor investing in Bitcoin Futures, on the other hand, will be expected to purchase many Futures contracts in order to hold their position, implying some regular trading expenses.
- Transaction fees for Bitcoin Futures contracts are typically a fraction of those for a Bitcoin spot exchange. So an investor can stay in the market for a long period until the trading fees are comparable to those for a Bitcoin spot trade.
Bitcoin vs Bitcoin Futures: Conclusion
Given the risks posed by Bitcoin futures, Bitcoin futures trading appeals to a lot of traders. Although Bitcoin futures trading is clearly better suited to seasoned traders with higher risk appetites, it also offers benefits that spot exchanges will never counter.
Therefore, futures contracts play an important role in investment risk management while also presenting a plethora of great opportunities and it seems many traders have recognized this already, based on the growing number of traders active in the futures market. Although you must determine if you are ready to trade futures, it seems fair to give it a chance once you have gained some exposure on the general spot exchanges. If you feel you are ready to trade futures, the best place to start is by registering at C-Trade exchange which just takes a few seconds.
C-Trade ensures quick withdrawals that doesn’t waste much time unlike other exchanges and are currently having the best reward program in the market.