In financial markets, a futures contract, which is mostly referred to as just futures, is a standardized legal contract/agreement to sell or buy a certain financial instrument or commodity at a predetermined price a specific price in the future. The price at which the parties agree to buy or sell the asset is referred to as the forward price while the time is called the delivery time.
Futures contracts are derivative products and they are negotiated and traded on futures exchanges. There are various cryptocurrency futures contracts but the Bitcoin futures contract is the most traded.
Futures allow investors to trade financial assets without having to hold the underlying asset. Therefore, if an investor is trading Bitcoin futures, he/she invests on the movements of market prices rather than physically owning the Bitcoins.
What are Bitcoin futures?
Bitcoin futures is a futures contract where the involved asset is Bitcoin.
If an investor speculates that the price of Bitcoin will rise in future, he/she enters into a futures contract to buy Bitcoin at a certain predetermined price with a Bitcoin seller. That means the buyer can only get the Bitcoins from the seller when the predetermined agreed price is reached.
On the other hand, if the investor speculates that the price of Bitcoin will drop in future, he/she enters into a futures contract to sell Bitcoin at a certain predetermined price with a Bitcoin buyer. That means the seller can only sell the Bitcoins to the buyer when the predetermined agreed price is reached.
When you buy (or go long) a Bitcoin futures contract, you enter an agreement to receive the agreed amount of Bitcoin or the equivalent amount of money depending on the agreed contract settlement. However, since most exchanges only allow cash settlements, Bitcoin wallets are not a necessity since the participants receive returns in terms of cash rather than the physical Bitcoins.
Where to trade Bitcoin futures
Bitcoin futures are traded on futures exchanges, which is either a traditional trading platform, a dedicated cryptocurrency exchange, or forex trading platform that has adopted offering futures contracts like Bitcoin futures
Several exchanges have adopted Bitcoin futures.
Bitcoin futures present a perfect opportunity for investors for speculating future Bitcoin prices without the investors having to physically own the physical Bitcoin.
One of the best Bitcoin futures exchanges isBTCC.com. It offers daily, weekly and perpetual contracts. In all these contracts it does not charge an opening fee and only charges a closing fee, which is calculates=d as a percentage of the product of the contract size per order (lots closed) and close position price
Since perpetual futures contracts don’t have an expiry, there is normally an overnight charge, which in BTCC.com is relatively low. In BTCC the overnight price is calculated as the product of Bitcoin Price at 5:00, Contract size and Interest Rate.
How Bitcoin futures trading works
For you to invest in Bitcoin futures trading, you will need to register for an account with a Bitcoin futures exchange like BTCC.com. Then, you will need to deposit some money (in fiat form) into the account.
Once your account is funded, you are good to start trading Bitcoin futures. However, before choosing the type of contract to invest in; either a long (buy) or a short (sell), you should do thorough research to correctly speculate the future market price movements.
If for example, you enter a long futures contract, you will make profit if the market price of Bitcoin rises and remains above your anticipated price (the predetermined price at which you had specified in the contract) by the expiration time. If the market price drops and fails to hit the predetermined market price by the time of the expiration of the contract, you end up making a loss.
If on the other hand, you enter a short futures contract, you will make profit if the market price of Bitcoin drops and remains below your anticipated price (the predetermined price at which you had specified in the contract) by the expiration time. If the market price rises and fails to hit the predetermined market price by the time of the expiration of the contract, you end up making a loss.
However, several factors determine your profits or losses and they vary from one exchange to another. These include;
Contract size/unit – determines how large a contract is. This is determined by how much a single Bitcoin futures contract costs. In BTCC.com for example, a single weekly Bitcoin futures contract unit costs one BTC per lot.
Minimum lots per order – This is the minimum amount of lots that you can trade in any given contract. In BTCC.com, the minimum lots per order are 0.01lot.
Contract type (short or long) – This depends on your market speculation. If you speculate a drop in prices you go short. If you speculate a rise in prices, you go long.
Leverage – This multiplies the invested money and allows you to hold larger contracts than your normal account balance would allow. It also multiplies your profit or losses by the same amount. BTCC.com offers leverages of 10x,20x, 50x, and 100x.
Expiration date – this refers to the predetermined time after which the Bitcoin futures contract shall expire and get automatically closed. BTCC.com offers Daily, weekly and perpetual Bitcoin futures. Daily contracts expire at the end of the trading day. Weekly futures contracts expire after a week while perpetual contracts do not have an expiration time. Every exchange has its set trading hours. BTCC.com trading hours are from Sunday 7:00 to Sunday 5:00.
Initial Margin – This is the initial amount of money required for you to enter a futures contract per lot.
Stop out ratio – This is the percentage of margin at which your contract is automatically closed if the market is moving against your speculation. In BTCC.com weekly Bitcoin futures, for example, the stop out ratio is 30%. Meaning if your account free margin drops past 30% your contract is automatically closed.
Settlement method – This refers to the form in which the profits or losses are added or deducted from the investor’s account. Most exchanges only offer cash settlements; meaning profits and losses are realized in the form of fiat currencies.
Bitcoin futures liquidation means closing a contract mostly when it is a loss.
Different exchanges have different liquidation thresholds where your contract is automatically closed. This threshold is normally specified as the stop out ratio. For BTCC.com, your contract is liquidated if you lose 70% of your collateral (the amount used to open the trade).
What are the fees associated with Bitcoin Futures Trading?
Before choosing an exchange for Bitcoin futures trading, you have to carefully look at its trading fees which include:
trading fees (trading and closing fees),
extension fees (cost of extending a contract past its usual closing time),
overnight fees (especially for weekly and perpetual contracts),