All across the cryptocurrency market there is innovation abound, both in terms of the projects and digit assets themselves, but also amongst trading platforms and cryptocurrency exchanges. These platforms offer a variety of assets, trading products, and financial instruments to choose from. Bitcoin futures are just one of many different derivatives products available to cryptocurrency traders today that can be used to speculate on Bitcoin price action and potentially earn a substantial profit.
Bitcoin futures aren’t for your average investor, and their existence can even have a lasting negative impact on spot markets and long-term pricing, so not all is glorious related to Bitcoin futures.
This in-depth Bitcoin futures guide will provide education regarding how Bitcoin futures work and explain what are Bitcoin futures and how to use them to your advantage financially to make money.
What Are Futures? Everything You Need To Know About Futures Trading
Futures are a popular way to trade, speculate, and hedge spot positions in the financial sector. By definition, they are a standardized contract or agreement to buy or sell something at a predetermined price as a specified time in the future. Interestingly, the Dutch pioneered futures contracts in the 17th century, and it was futures that were behind what drove “Tulip mania” that is often associated with Bitcoin and cryptocurrencies. Tulip mania, was the first ever recorded financial bubble, another term Bitcoin is often associated with.
According to Wikipedia, the 1972 creation of the International Monetary Market by the Chicago Mercantile Exchange known today more commonly as CME Group was the world’s first financial futures exchange, and launched forex currency futures. Later, in 1976, the IMM added interest rate futures on US treasury bills, and in 1982 stock market index futures were added for the first time.
From stock trading forward, several more futures trading products have been introduced, including Bitcoin in 2017, and Ethereum in 2021. More cryptocurrency products are likely to develop as the industry grows acceptance and popularity.
Wat Are Bitcoin Futures? Bitcoin Futures Explained In Easy To Understand Terms
Bitcoin futures are a version of futures derivatives contracts that involve speculating on the valuation of Bitcoin – the leading digital currency by market capitalization. CME Group and the Chicago Board Options Exchange were the two primary companies and exchanges to introduce Bitcoin futures in 2017 at the end of the bull market and peak Bitcoin fever back then.
Before their existence, there were very few ways for traders to short Bitcoin, and their introduction correlated with the start of the 2018 Bitcoin bear market, where the average price action for months at a time was bearish.
The current market trend in the virtual currency space is bullish again starting in the third quarter of 2020, thanks to renewed interest in the asset class, that has also caused a resurgence of interest in Bitcoin futures trading. Bitcoin futures open interest has broken all records along with a new all time high in price.
How Do Bitcoin Futures Work?
Bitcoin futures are an agreement to buy or sell Bitcoin (BTC) at a predetermined price as a specified time in the future, between two traders that don’t know one another. The trade is made by a broker through a derivatives contract tied to the current market price of BTCUSD. The contract must be settled by the time the contract expires on a date set in the future.
How Do Bitcoin Futures Correlate With Bitcoin Price?
Bitcoin futures can have an impact on Bitcoin price in a variety of interesting ways. For example, large scale investors or traders called whales, can attempt to use their capital to influence spot markets temporarily to settle Bitcoin futures contracts in their favor, which is often why price volatility increases around futures or options expiry dates. Bitcoin futures price contracts are settled based on an index from other cryptocurrency exchanges.
But there can also be unforeseen correlations. For example, when the leading cryptocurrency by market cap, Bitcoin, was introduced on CME Group, interest surged initially, but immediately began to decrease, which studies show matches the past performance of other markets when futures were first introduced.
This has given the introduction of futures a bearish tone, because it allows traders to hedge spot positions and short Bitcoin. But Bitcoin futures aren’t always bearish, and there are long positions in addition to shorts.
When Buying Bitcoin Futures – Price Goes Up?
Bitcoin futures speculates on the future market value of Bitcoin, but when it is time to settle the contract at expiry, it is done at the current price per BTC. This doesn’t necessarily translate to an increase in Bitcoin price, like increased activity in buying on a spot exchange.
Some Bitcoin futures are settled in cash, which has no impact on the limited BTC supply. If the Bitcoin futures contract is settled in BTC, however, it can cause the price of BTC to go up when contracts are settled back into BTC, especially when it is shorts covering, or an abundance of long orders.
Important Facts To Know About Bitcoin Futures
Because Bitcoin futures are different from traditional spot market crypto trading, there are several key pieces of information to pay close attention to when opening or closing any positions. Failing to pay attention to these critical areas could lead to total capital loss.
Here are the most important factors related to Bitcoin futures:
- Expiry Date. The expiry date is the date when the contracts are required to be settled. Contract lengths vary from month to month, quarterly, and annually. Oftentimes, traders can speculate on months ahead in the market.
- Strike Price. The strike price is the predetermined price at which a derivative contract can be bought or sold. The strike price is typically tied to a price feed or index, fed in from other platforms and cryptocurrency exchanges.
- Long or Short. Long or short positions represent the direction of the price that is expected to go in the future, related to the contract. A trader expecting to sell the contract at a profit goes long, and a trader expecting to buy the contract at a profit, goes short. Long or short positions have nothing to do with the length of time, despite what the name might imply.
- American or European. This refers only to the methodology in which it is used to settle contracts. European futures can only be settled on the expiry date, while American futures can settle any time leading up to or on the expiry date. Both Americans and Europeans can use either type of Bitcoin futures contract.
- Contract Value. The contact value represents the value of the contact, which is not the total value that is required by the trader to keep in their account. For example, a $100,000 contract value order at 100x leverage, only requires $1,000 in margin.
- Calculating Profit and Losses. Anyone participating in Bitcoin futures trading must do their own analysis in calculating the outcome of potential positions, to measure risk versus reward, and to ensure profitability. Profit and losses, also called PnL, is essentially a track record of your ROI resulting from successful trades.
There are also several PnL calculators that exist on the web that traders can access for free or at a monthly cost. However, only you are responsible for your own calculations and position management.
Bitcoin Futures Vs Bitcoin CFDs: What Are The Differences And Similarities?
Bitcoin futures are only one type of cryptocurrency derivatives contract that involves BTC trading. In addition to Bitcoin futures, there are also Bitcoin options and Bitcoin CFDs that are slightly different, while maintaining the benefits futures bring to traders.
CFDs stand for contract for difference, and offer greater flexibility over Bitcoin futures, but many of the same benefits. CFDs, like futures, don’t have to be Bitcoin, but for the subject matter is what we’re focused on. For example, PrimeXBT offers Bitcoin-based CFDs where accounts are settled into BTC, but Bitcoin and other cryptocurrencies, even stock indices, forex, commodities, and more can be traded as CFDs.
Here’s how Bitcoin futures and CFD trading compares and differs.
The Benefits of Bitcoin Futures
- Accessibility. Just about anyone can participate in Bitcoin futures thanks to the always on cryptocurrency market. The globalization the crypto market offers brings deep liquidity to traders and makes for a better trading environment,
- Regulatory Support. Bitcoin futures are among the few types of crypto derivatives offered by exchanges that cooperate with government entities that regulate financial markets such as the SEC and CFTC.
- Cash Settlement. Traders might prefer Bitcoin futures trading over exposure to cryptocurrencies directly. They may choose to speculate on Bitcoin price, but do not want the risk involved with owning and custody of BTC themselves, and can settle many Bitcoin futures in cash instead.
- Margin Trading. Margin accounts allow traders to apply leverage to positions on futures contracts, increasing the contract value to yield greater results from the capital on the line. Margin trading can also work as a risk management strategy by putting less capital on the line than what the position would otherwise normally require for capital.
- Crypto Shorts. Before Bitcoin futures and other derivatives contracts, there wasn’t a way to short crypto and only a way to own the base digital currency assets. Crypto assets require custody yourself, making owning them more technically involved than other assets. Shorting the highly volatile crypto asset class can be especially lucrative and is a great way to hedge against volatility during bull markets.
Disadvantages of Bitcoin Futures
- Price Limits That May Reduce Your Profits. To control volatility and maintain a stable market with less violent price swings, Bitcoin futures contracts often have limits imposed to the price that can restrict the amount of profits that can be made from price action.
- Bitcoin Futures Can Have A Prolonged Negative Impact On Markets. As previously noted above, the introduction of Bitcoin futures is what caused the peak of the bull market in 2017 for Bitcoin, and a long bear market followed as a result. Bitcoin price dropped by 80% following the first Bitcoin futures contracts on CME and CBOE.
- An Unstable Pricing Method. Because futures trading platforms aren’t exchanges in the traditional sense, pricing is based on an unreliable index taken from a variety of top cryptocurrency exchanges. Whales can further use this index pricing to cause dramatic price swings to settle Bitcoin futures contracts in their favor.
Bitcoin CFDs Benefits
- Easy Setup. Setting up CFDs for brokers is simple. Traders can open contracts at any time without any time or price restrictions. This also makes account set up at the broker usually much less restrictive also.
- Leverage Trading. Like futures, CFDs with margin accounts can amplify profits by adding leverage to any positions. Leverage increases the risk relative to the position as well, so proper risk management is necessary.
- Advanced Technical Instruments. Because CFDs can be designed for any asset at all, exotic or advanced trading instruments can be created. Certain features can be added to financial instruments, such as conditions, or leverage. It also means platforms like PrimeXBT can offer Bitcoin, stock indices, forex, and more under one roof.
- Better Regulation. CFDs provide better regulatory support from various regulatory entities. Oftentimes futures contracts have high investor thresholds that require significant deposits or income levels to access. CFDs are available to all.
- Speed of Trading. CFDs are not tied to a specific price or expiration date, meaning that the speed of trading is greatly enhanced. Traders can get in and out of contracts quickly, any time they’d like, and don’t have to adhere to any specific conditions
- Increased Access To Many Popular Cryptos. Because CFDs can be made to all kinds of exotic trading pairs, it allows brokers to provide exposure to more popular cryptocurrencies than most cryptocurrency exchanges can. For example, PrimeXBT offers Bitcoin, Ethereum, Litecoin, and EOS.
Disadvantages of Bitcoin CFDs
- Price Considerations. CFDs, like Bitcoin futures, rely on an index price or price feed and liquidity from various providers and exchange platforms. This can be beneficial, depending on the providers, but oftentimes can result in unusual fluctuations in pricing.
- Trust Considerations. CFD providers aren’t always as widely known as CME Group, which started futures contracts back in 1972 as part of the IMM. Look for reputable CFD providers, such as PrimeXBT, who have awards to show for their operations.
- Bitcoin CFDs Are Speculative In Nature. CFDs, like any derivatives product, are speculative in nature. Combined with how speculative the asset class is itself, the risk associated with both can be enhanced together.
Bitcoin CFDs Versus Bitcoin Futures Compared
This table outlines the key differences and similarities between Bitcoin futures and Bitcoin CFDs.
| CFDs | Futures | |
| What It Is | The option to buy or sell a contract at any time |
The obligation to buy or sell a contract by expiry |
| High profits | Yes | Yes |
| Way to hedge the market | Yes | Yes |
| Easy to access | Yes | No |
| Up front premium fees | No | No |
| Expiry-free flexibility | Yes | No |
| Risk level | Medium | High |
Bitcoin Futures FAQ: Frequently Asked Questions About Bitcoin Futures and CFDs
Bitcoin futures and CFDs are serious trading products and should be fully understood before trading. Therefore, we have crafted this FAQ to help answer some of the most commonly asked questions about Bitcoin futures and CFDs.
What Are Bitcoin Futures?
Bitcoin futures are a type of crypto derivatives contract that allows investors to hedge against positions and traders to profit from speculating on Bitcoin prices in the future.
What Are Bitcoin Derivatives?
Bitcoin derivatives refers to any type of financial instrument that is tied to the price of an underlying cryptocurrency asset such as Bitcoin.
What Are CFDs?
CFD stands for contract for difference, and is a similar type of derivatives contract to Bitcoin futures, with added flexibility. CFDs aren’t tied to an expiry date, which lets traders get in and out of position quickly and efficiently.
What Are The Difference Between CFDs and Bitcoin Futures?
The primary difference between Bitcoin CFDs and Bitcoin futures, is the term tied to each contract. Futures include an expiry date, while CFDs let traders open or close positions at any time.
Can You Make Money On Bitcoin Futures and CFDs?
With the right skills, tools, and patience, there is a lot of money to be made in Bitcoin futures or in CFD trading. Like any investment or trading, there is also risk involved so risk management must be a central focus.
Are Bitcoin Futures and CFDs Safe?
Both types of contracts are safe from any harm, but there is risk associated with these types of contracts that are exposed to the underlying asset’s market volatility.
Which Is Better? Futures Versus CFDs?
CFDs and futures are very similar, however, CFDs are better due to the flexibility they provide.
Where Can I Trade Bitcoin CFDs or Futures?
Bitcoin futures can be traded on the Chicago Merchantile Exchange otherwise known as CME Group, or Bitcoin CFDs are available at PrimeXBT. Both platforms are highly reputable.
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