How to trade Bitcoin futures contracts



Trading Bitcoin futures contracts involves engaging in a cutting-edge realm of derivative financial instruments, closely resembling traditional futures contracts. These dynamic contracts facilitate two parties to harmoniously agree upon acquiring or relinquishing a specific quantity of Bitcoin at a predetermined price on a set date. While futures contracts have been the go-to choice for traders to speculate on Bitcoin price movements, they have also emerged as a robust tool for proficiently hedging risks. Remarkably, even seasoned miners have capitalized on futures to fortify themselves against potential declines in Bitcoin prices, effectively safeguarding their operational expenses.

The allure of futures lies in the realm of diversified portfolio opportunities, leveraged trading, and the assurance of a relatively stable future income. Venturing into the captivating world of advanced futures trading strategies, ambitious traders may explore the realm of arbitrage. By skillfully implementing arbitrage strategies, such as "cash-and-carry" and interexchange arbitrage, one can artfully navigate through market intricacies, effectively mitigating trading risks, and ultimately reaping bountiful profits.

In the ever-evolving landscape of cryptocurrency investment, Bitcoin futures contracts stand as a beacon of innovation, offering an unparalleled alternative to traditional holding methods. These intricately designed financial instruments demand a profound comprehension of their mechanics, empowering astute traders to navigate the market with confidence and prudence. Among the plethora of advantages futures trading unveils, the ability to adroitly fix prices through hedging and astutely capitalize on market downturns through shorting stands as an exhilarating avenue for maximizing gains.

What are bitcoin futures?

Bitcoin futures can be described as financial instruments that closely resemble typical futures contracts. In essence, they are agreements where parties commit to buying or selling a specific quantity of Bitcoin at a predetermined price (known as the forward price) on a specified future date. If you decide to take a long position (opt to buy) on a Bitcoin futures contract and the price at the contract's expiration is higher than the forward price, you will earn a profit. The mark-to-market price is the estimated fair value of the asset, calculated based on its current price and other factors. If the mark-to-market price is lower than the forward price at the futures contract's expiration, you will incur losses in a long position or realize profits in a short position. A short position means that a trader sells an asset they don't actually own, hoping for its price to decline. Then, when the asset's price falls, the trader buys it back and profits from the price difference. Futures contracts can be settled physically, involving the exchange of the actual asset, or more commonly, through cash settlements.

Why do traders use bitcoin futures?

Traders use Bitcoin futures for various reasons. One of the main purposes for buyers and sellers is to lock in future asset prices, a process known as hedging. In industries where stable profits are essential for covering expenses, futures have traditionally been used as a hedging tool.

Additionally, traders utilize futures for speculation. Long and short positions enable them to make bets on the market's direction. On a bearish market, profits can be made by entering short positions. Futures also offer opportunities for arbitrage and implementing complex trading strategies, allowing traders to exploit price differences and benefit from market fluctuations.

Advantages of Trading Bitcoin Futures


While hedging may seem more applicable in physical commodity markets, it can also be employed in the context of cryptocurrencies, including Bitcoin. Bitcoin miners have ongoing operational expenses, similar to agricultural producers, and they depend on fair prices for their output. Hedging involves using both the futures and spot markets to protect their interests. Let's explore how this can work.

Futures Contracts

To safeguard their BTC assets, a Bitcoin miner can take a short position on a futures contract. Upon contract expiration, the miner is obliged to settle with the counterparty.

If the Bitcoin price in the futures market (mark-to-market price) turns out to be higher than the contract's forward price, the miner must pay the difference to the counterparty. If the mark-to-market price is lower than the contract's forward price, the counterparty in the long position pays the difference to the miner.

Spot Market

On the expiration day of the futures contract, the miner sells their BTC on the spot market. The sale is executed at the current market price, which should be close to the mark-to-market price in the futures market.

However, trading on the spot market effectively smoothens any profits or losses obtained in the futures market. Both these values, the profit or loss on the futures market and the results from the spot market sale, together provide the miner with the desired hedged price. Let's examine both of these steps using numerical examples.

Combining Futures Contracts and Spot Trading

Through the strategic combination of futures contracts and spot trading, the miner takes a short position on a 3-month contract for 1 BTC, valued at $30,000. If the mark-to-market price upon expiration stands at $35,000, the miner incurs a loss of $5,000, which is duly settled with the counterparty holding the long position. Concurrently, the miner sells 1 BTC on the spot market, where the current spot price also amounts to $35,000. The resulting revenue of $35,000 adequately offsets the $5,000 loss, leaving the miner with a hedged amount of $30,000.

Leverage and Margin

Margin trading is an interesting option for investors as it allows using borrowed funds to open larger positions than what is available to the trader. Larger positions can potentially yield higher profits as they amplify even small market fluctuations. However, if the market moves against the trader, the initial capital can be quickly depleted.

On the exchange, leverage is displayed as a multiplier or percentage. For example, a 10x multiplier increases the position size by 10 times. Thus, with a 10x leverage, $3,000 USD can be used to trade with $30,000 USD. In margin trading, the initial capital used to cover potential losses is called margin. Let's consider an example:

You buy two bitcoin futures contracts, each priced at $30,000 USD. Your exchange provides you with 20x leverage, so you only need $3,000 USD as margin. This margin allows the exchange to cover your potential losses. If your losses exceed $3,000 USD, your position will be liquidated. The margin percentage is calculated as the ratio of the leverage multiplier to 100. For instance, 10% corresponds to a 10x multiplier, 5% to a 20x multiplier, and 1% to a 100x multiplier. This percentage indicates how much the contract price can fall relative to the target price before the position gets liquidated.

Portfolio Diversification

By using Bitcoin futures, you can expand the diversification of your portfolio and explore new trading strategies. It is recommended to maintain a well-balanced portfolio that includes various coins and products. Futures provide an opportunity to experiment with different trading strategies rather than just holding assets. Additionally, there are low-risk arbitrage strategies with more moderate returns that can help reduce the overall risk of your portfolio.