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You can trade cryptocurrency futures options with brokers such as Interactive Brokers, Edge Clear, Ironbeam, or TradeStation. The number of venues offering cryptocurrency futures trading is growing, as are the numbers of participants and trading volumes compared to other commodities. Whether you’re looking for a seamless, regulated, or centralized exchange, many platforms offer access to trade bitcoin futures. Most platforms offering bitcoin futures provide what is called position limits and leverage to increase the chances of you making a profit.

Buying bitcoin futures gives you access to the bitcoin market without actually owning a digital wallet. Doing this means you don’t own bitcoin directly, instead, you own bitcoin futures. Trading bitcoin futures requires a substantial level of technical https://www.topforexnews.org/investing/12-best-investments-for-any-age-or-income-4/ skills. You need to understand how the crypto market works, study several market predictions, and have a solid trading plan. Essentially, bitcoin futures are speculative, but it is possible to utilize helpful market info from professionals.

In addition, there are centralized exchanges like Binance that allow massive risk-taking. Bitcoin futures traders are also subject to exchange fees, which can affect trading profits. Bitcoin futures traders often use that leverage to speculate on short-term swings in the market in an attempt to generate large returns on relatively small upfront investments. Bitcoin futures offer investors a unique way to speculate in the crypto market and hedge their crypto holdings. But before you dip your toes into crypto futures, we’ll help you understand how they work and the risks involved. The exchange calls for a 50% margin for Bitcoin and 60% for Ether futures trading.

  1. Whether you’re looking for a seamless, regulated, or centralized exchange, many platforms offer access to trade bitcoin futures.
  2. 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.
  3. These contracts are bought and sold between two investors who speculate about that asset’s price at a specific date in the future.
  4. As such, Bitcoin futures contracts also offer risk mitigation and hedging possibilities.

Our futures contract obligates us to purchase $40.000 in bitcoin in two months. If the price is then trading at $50.000, we have made a $10.000 profit per share. But if it has dropped to $30.000 by that time, we must still purchase it at $40.000, effectively losing $10.000 per position. Since perpetual swaps don’t have expiration dates, exchanges use a price syncing system called the funding rate mechanism. This mechanism stabilizes the short and long positions of perpetual swaps by either adding or subtracting trades. It is more like a fee that helps maintain the short and long positions of the perpetual contracts.

The same is reflected in the $5 difference we noted in the previous section. Anyone with money investing in a futures contract can also invest it in secure bonds to earn the minimum available risk-free rate of return. Hence, the formula includes a provision for computing the returns, which are at least at par with the risk-free rate over time until the contract expires. If there is no chance of arbitrage, the futures price is the sum of the spot price and the cost of carry, which is reflected in the formula.

What Are Futures Contracts?

A futures contract is an agreement between two traders that obligates a trader to buy or sell an asset at a specific time, quantity and price. For example, you might enter an agreement in mid-March to buy one Bitcoin for $4,000 for August 30. You could also be on the other side of the deal, agreeing to selling a Bitcoin for a fixed price. Are there reasons for an investor to allocate into futures ETFs instead of spot bitcoin funds?

Popular Exchanges for Cryptocurrency Futures

To trade futures, you must have an account with a registered futures commission merchant or introducing broker. Investing in cryptocurrencies and Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

Hedgers are interested in the underlying asset, and they seek to hedge out the risk of price changes, while speculators do not have any practical use of the assets pegged to the futures contract. Instead, these people speculate and buy futures to sell them later with profit to interested parties. The futures agreement includes the underlying asset’s quality, quantity, and price. First, since it is a trade agreed to be carried out in the future at a particular time, and for a specific price, the buyer of the underlying asset is protected against the asset’s price movements in the market. This may result in a profit or, sometimes, a loss to the contract holder as there is a commitment to buy or sell at the specified price. Futures is a standard contract between two parties to buy or sell a specific asset at a predetermined date in the future, at a particular time.

The first is the change for risk-free rate from an annual to a daily basis, and the second point refers to the fact that there is no dividend in cases of Bitcoin so ‘d’ can be removed. There are many bitcoin ETFs, including ProShares Bitcoin Strategy ETF (BITO), Valkyrie Bitcoin Strategy ETF (BTF), VanEck https://www.forex-world.net/currency-pairs/gbp-sgd/ Bitcoin Strategy ETF (XBTF), Global X Blockchain, and more. The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice. Hedging reduces a trader’s overall risk, although it does also limit their potential profits.

These products differ from the new spot ETFs, whose issuers procure physical bitcoin and then offer shares that represent fractional interests in the portfolios of bitcoins. “Investor appetite will switch from products offering bitcoin futures exposure to direct bitcoin exposure,” says Kyle DaCruz, VanEck’s director of digital-assets products. “Spot products should more closely track the price of bitcoin,” VanEck is not waiting around to watch the fate of futures-based bitcoin funds. It closed its $43 million Bitcoin Strategy Fund (XBTF) futures ETF last month in favor of a new spot offering, the VanEck Bitcoin Trust (HODL), which holds $176 million currently. For the 20 months leading up to January 2024, investors who wanted to put money into U.S. exchange-traded bitcoin funds were forced to play the futures market. It is essential to know that the price of a bitcoin futures contract is broadly proportional to the price of bitcoin.

Generally, the latter approval is a function of funding requirements and the account holder’s experience with derivatives trading. The theoretical formula doesn’t account for instances that can drastically impact futures prices. While spot prices can instantly reflect Bitcoin-related developments, any perceived volatility and its impact over the remaining days to expiry make futures pricing a guessing game. Most contracts in the finance space give the ‘right’ to do something to the contract holder.

Pros and cons of bitcoin futures

Suppose an investor purchases two Bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin when the futures contract was purchased was $5,000 each, totaling $50,000 for both futures contracts. Bitcoin’s short-term futures contracts are the contracts with the nearest expiration date. The CME offers monthly BTC futures contracts for six months and additional quarterly contracts for each of the four upcoming quarters. CME Group also offers an additional December contract if only one is listed. There are various futures contracts, for currencies, stock indexes and commodities.

What is ProShares Bitcoin ETF?

CME introduced trading in Bitcoin options in January 2020 and Ether futures options in September 2022. Nevertheless, the SEC made history in 2021 when it approved the first Bitcoin futures ETF, the ProShares 10 best high return investments in 2021 Bitcoin Strategy ETF (BITO), to trade on the New York Stock Exchange. Leveraging 10-20% of a Bitcoin future means that an investment has both a high potential for profit, but also for a loss.

So, trading bitcoin futures is an alternative to spot trading, which involves the actual buying or selling of underlying crypto. Under a theory eventually judged to be “arbitrary and capricious” the SEC was okay with futures-based bitcoin funds, since the prices were verified under rules of regulated commodity exchanges. Nevermind that the futures prices are based on the spot-market for bitcoin.