Every cryptocurrency trader needs a good toolkit, and futures are the tools you can rely on to get the job done. They allow you to take advantage of price fluctuations without owning the underlying assets, not to mention you can use leverage to maximize revenue generation and growth. We’re only coming to terms with the popularity of futures. They’re available for nearly every type of cryptocurrency, but they’re most famously used to trade Bitcoin, which has had more than its fair share of critics on Wall Street. Futures don’t entail buying P2P Bitcoin, but they do give you a sturdy way to profit from both rising and falling markets.
What Exactly Are Bitcoin Futures, And How Do They Work?
Bitcoin futures are derivatives, which are financial contracts in which two parties agree to buy or sell BTC somewhere down the line for a set price. Understanding the relationship between the spot price and the future price is of the essence in the derivatives market. The spot price is the current market value of Bitcoin, whereas the futures price is the rate you lock in when trading a futures contract. The spot price is typically below the futures price. To put it simply, there are two parties, one bet, and one winner. One person believes Bitcoin will surge to a fresh high, while the other person is convinced it’s going to fall.
Attention must be paid to the fact that BTC futures expire, and you have the option to roll over the contract or let it expire and take profits or losses. Each position requires an initial margin to open, so if your account balance falls below the minimum maintenance requirement due to market turbulence, you’ll receive a margin call requiring you to deposit additional funds. Bitcoin futures contracts trade on the Chicago Mercantile Exchange (CME), the largest and most established venue. Most of them are settled in Tether (USDT), which combines the stability of the dollar with the speed and flexibility of a blockchain asset.
The Ins And Outs Of Trading Bitcoin Futures
Bitcoin futures make it possible for you to limit your downside and protect against the above-average volatility plaguing the cryptocurrency market. These are created on an as-needed basis, whenever traders open new positions, and they don’t require the exchange to hold BTC. It doesn’t really matter what exchange you trade on, but it would be best to pick the one with the biggest number of futures contracts issued, as it offers superior liquidity from an investment POV. This means tighter spreads, smoother execution, and a lower chance of price slippage, factors that become more important as your position size grows.
When the cryptocurrency market turns south, whoever bought your Bitcoin futures contract is legally obligated to take the opposing side of your position when it expires. On the flip side, whenever you buy a Bitcoin futures contract, you lock down the price early. Hence, you can add big gains to your portfolio by buying Bitcoin for less than it’s worth only to sell it at a higher price once the cryptocurrency market rebounds. While it’s possible to trade on OTC markets, they’re less regulated and less accessible to retail investors. Futures are zero-sum contracts, which means one trader’s profit is equal to the other trader’s loss.
The most common use of BTC futures contracts is speculative trading, which offers the advantage of not having to time the market. The difference between speculation and gambling is that the former involves a calculated risk, even though the outcome is uncertain, while the latter relies mostly on chance. Leverage allows you to control a large Bitcoin futures contract with a small upfront investment, but it requires careful risk management because it can lead to big wins as well as big losses. Trading BTC futures can diversify your portfolio by providing exposure to a digital asset that can double your money.
Using specific, time-tested strategies, you can limit losses and maximize returns. Here are some suggestions to consider:
- Directional Trading: If you’re new to trading Bitcoin futures, directional trading can serve as a more accessible entry point. You buy a contract, hoping to sell it later at a higher price, or sell the contract first, aiming to buy it back later at a lower price. Of course, this strategy isn’t perfect. Directional trading is vulnerable to abrupt changes in market sentiment following news events or economic reports. Put simply, you have to spot bullish or bearish trends before they become obvious.
- Trend Following: Trend following, used by solo retail traders and billion-dollar hedge funds alike, aims to capture gains by moving in the direction of the market trend. You enter a position once a trend is formally established, and hold on to that position until the trend starts to lose strength and signals a reversal. If Bitcoin’s price consistently makes higher highs and lows for several days, that’s bullish momentum. But if it suddenly starts making lower lows and breaks below a key support level, this could signal a trend reversal.
Is There Counterparty Risk In Bitcoin Futures Contracts?
For every seller in the cryptocurrency market, there’s a buyer, and the other way around. This is commonly referred to as counterparty risk, which can be defined as the likelihood or probability that one of those involved in the transaction might default on their contractual obligation. Although Bitcoin futures contracts minimize the chance that an individual trader fails to meet their obligations, they don’t eliminate counterparty risk entirely. If a massive, black swan market crash were to happen, the exchange could run out of funds to cover liquidations; it’s a rare event that occurs surprisingly often.
Why keep all your cash on an exchange? With 10x leverage, you only need to deposit $1,000 to trade with the power of $10,000. By leaving the remaining 90% in cold storage, you effectively mitigate the risk of platform failure or lost access to your funds. At the same time, you maintain flexibility in your trading approach. Your margin deposit is just the collateral needed to open and manage positions.
