How to Trade Bitcoin Futures

Bitcoin has been performing quite well in the financial markets in the past year, with an increase of 1800% if you invested at the start of January 2017 to the first week of December 2017. This has made Bitcoin quite straightforward, where you can profit in bitcoin only if the price of bitcoin increases.

The entry of futures contracts

However, Wall street thinks that the way how Bitcoin is traded should be changed. The institutional financiers then offered the secondary or derivative markets, i.e. futures and options, to the public through CBOE and CME.

On December 10 2017, the CBOE, which is the Chicago Board Options Exchange, offered the trading of bitcoin futures contract to the investing public. CME, Chicago Mercantile Exchange, followed on December 18, 2017.

Of course, if you would like to invest in derivatives that do not have unlimited downside risk then you have to consider instruments that are more symmetric in nature. These are option type instruments which will only payout a certain percentage of return based on the expiry position.

There are a number of respectable bitcoin binary options that you can use in order to limit your exposure to these markets. All that will require you to do is enter a position and the price you think the price will be at by the expiry time.

Important Terms with bitcoin Futures

There are a few important things to know about futures first, and these are the SPOT Price, Expiry, Minimum tick and Margin.

Spot Price is the price at the moment you bought your Futures Contract.

Expiry is the length of time that the contract would be valid. It can range from a month, like the first bitcoin futures contract, to a year.

Minimum Tick is the amount of price change that is required in order to be credited. As per CME rules, it is $5

Margin is the cash collateral that you need to offer so that the broker will be able to trade the contract. Most of the brokers offer a 44% margin, with some going up as 50% like Interactive Brokers, and some to 33%.

How do I profit from Futures?

The bitcoin futures currently offered are in cash settlement basis, which means that you can exchange your futures contracts for money, not for Bitcoin.

For example, let us assume you bought 1 futures contract for 5 bitcoins, which is what CME offers. Let us say the spot price, which is the price of Bitcoin at the time you bought the contract, is $15,000 with an expiration date of 1 month.

The Broker requires a 50% margin, which should be $37,500 which is 50% of 1 bitcoin multiplied by 5 Bitcoins. After one month, the Value of Bitcoin went down to $15,100 which means that you have $100 profit per Bitcoin.

For every $5 movement, you get $25 since you have 5 Bitcoins in your contract. You multiply the price change by 5, which means that you have a $500-dollar increase. If the price increases to $15,104, you only get $500-dollar profit since $4 is lower than the minimum tick of $5.

If the Price decreases to $14,900, you will get a loss of $500, which means your account must have $38,000 which is your loss ($500) plus the collateral ($37,500). If you do not have enough money, the broker can take your cash in your trading account. This is what we term as a margin call, since the broker needs to take your cash to pay for the risky investment that you took.

If you have enough money, you can just hold the future contract until the expiry date of one month. You have the chance to even profit again if the market turns to your favor or you can even lose more money if the market continues to have a lower price.

Which brokers offer Bitcoin Futures?

There are a few brokers who offer Bitcoin Futures contracts, and most brokers just go through the CME and CBOE to buy and sell futures. You might think that it is better that you sign up with the CME and CBOE yourself to trade futures contract, but you will not be able to directly trade from it if you do not have the necessary license and minimum capital requirements.

The big institutional brokers include Ameritrade, TradeStation, Interactive Brokers, and Ally Invest, as per media outlets. Usually forex brokers offer Bitcoin Futures Contract and Bitcoin currency pairs like BTC/USD.

Futures Contracts, whether it be for Bitcoin, Oil, Gold and other commodities, are risky financial instruments. Please invest only what you can afford to lose.

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4 Responses

  1. Sally says:

    Really interesting perspective you have here Elizabeth. Can you explain to me about a CFD for example

    • Elizabeth says:

      A CFD will just be a difference in the spreads of the product. There is not really that much more to it if I must be honest.

  2. Sally says:

    My damn portfolio so much in the red at the moment. It’s such a complete joke. What do you suggest elizabeth?

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