What Are Bitcoin Futures?

Bitcoin futures enable investors to gain exposure to Bitcoin (BTCUSD) without having to hold the underlying cryptocurrency. They are similar to a futures contract for a commodity or stock index in that they allow investors to speculate on the cryptocurrency’s future price. The Chicago Mercantile Exchange (CME) offers monthly contracts for cash settlement. This means that an investor takes cash instead of physical delivery of bitcoin upon settlement of the contract.

The Cboe Options Exchange offered the first bitcoin futures contract on Dec. 10, 2017. But it discontinued offering new contracts in March 2019. The CME opened its bitcoin futures platform on Dec. 18, 2017. In addition to standard bitcoin contracts, the exchange offers Micro Bitcoin futures, which are 1/10th the size of a standard bitcoin, and options on bitcoin futures. Other venues, like Bakkt and Intercontinental Exchange, offer daily and monthly bitcoin futures contracts for physical delivery.

Understanding Bitcoin Futures Investing

Bitcoin futures serve many purposes, each one unique, for different actors in the Bitcoin ecosystem. For Bitcoin miners, futures are a means to lock in prices that ensure a return on their mining investments, regardless of the crypto’s future price trajectory. Investors use bitcoin futures to hedge against their positions in the spot market. For example, if an investor bets on a price increase for bitcoin in the spot market, then she might short its futures as a hedge. Thus, she stands to make money even if the bitcoin price moves in a direction opposite to the one specified in her bet. Speculators and traders, who frequently move in and out of futures trades, might use bitcoin futures for short- and long-term profits.

There are several benefits to trading bitcoin futures instead of the underlying cryptocurrency. First, bitcoin futures contracts are traded on an exchange regulated by the Commodity Futures Trading Commission, which might give large institutional investors some measure of confidence to participate. For most of its short existence, the cryptocurrency has traded outside the bounds of regulation, making it a risky asset for institutional money.

Second, because the futures are cash-settled, a Bitcoin wallet is not required. No physical exchange of bitcoin takes place in the transaction. Thus, a bitcoin futures trade eliminates the risk of holding a volatile asset class with steep price changes. Also, holding bitcoin in custody can be an expensive affair and add to the overall costs. Finally, futures contracts have position limits and price limits that enable investors to curtail their risk exposure to a given asset class.

Note that as of October 2021, investors can gain exposure to bitcoin without buying or selling futures themselves. The ProShares’ Bitcoin Strategy Fund (BITO) tracks CME bitcoin futures. The exchange-traded fund (ETF) started trading on Oct. 19, 2021, as the first bitcoin ETF.

Where can you trade bitcoin futures?

Growth of the bitcoin futures market has paralleled that of the cryptocurrency’s spot market. Cryptocurrency exchanges were the first venues to offer bitcoin futures trading capability. But the absence of regulation for cryptocurrencies made them risky venues for serious traders.

The launch of bitcoin futures trading at CME and Cboe changed the status quo. While Cboe has discontinued bitcoin futures trading at its venue, CME has doubled down on cryptocurrencies and introduced other derivative products related to it. For example, the Micro Bitcoin futures is 1/10th the size of a standard bitcoin futures contract at CME.

Bakkt, which is backed by NYSE owner Intercontinental Exchange, was launched in 2019 and advertises itself as an end-to-end solution to promote regulated price discovery and market liquidity. It also offers trading in physically settled bitcoin futures and options. ErisX is a Chicago-based trading firm that offers cash-settled bounded bitcoin futures trading capability that limits exposure to the cryptocurrency by setting upper and lower bounds.

Exchanges like Seychelles-based OKEx and Malta-based Binance are some of the biggest venues for trading in bitcoin futures. The latter exchange, in fact, is ranked first based on the numbers for open interest contracts on its platform. However, it is not regulated by U.S. authorities.

How does bitcoin futures trading work?

The rules and setup for bitcoin futures is the same as that for regular futures trading. First, you need to set up an account with the brokerage or exchange to begin trading. Once your account is approved, you can begin trading.

Futures trading makes heavy use of leverage to execute trades. In the unregulated Wild West of cryptocurrencies, the leverage amount can vary wildly between exchanges. For example, Binance offered leverage of up to 125 percent of the trading amount to traders in 2019. It reduced the leverage amount to 20 percent in July 2021.

The main considerations for bitcoin futures accounts are margin requirements and contract details. Margins are the minimum collateral that you must have in your account to execute trades. The higher the amount of the trade, the greater the margin amount required by the broker or exchange to execute the trade.

A point to note here is that exchanges and brokerages can have different margin requirements. For example, CME has a base margin requirement, and brokerages like TD Ameritrade that offer CME bitcoin futures trading as part of their product suite can set margin rates on top of the base rate set by CME.

Because Bitcoin is a risky and volatile asset, regulated exchanges generally require higher margin amounts compared to other assets. Some cryptocurrency exchanges, like Binance, allow the use of cryptocurrencies as margin. For example, you can use stablecoins like Tether or bitcoin as margin for your trades at Binance.

Reading contract details for bitcoin futures

Below are the contract details for bitcoin futures offered by CME:

• Contract unit: 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate
• Price quotation: USD
• Trading hours: Sunday–Friday, 6 p.m.–5 p.m.
• Product code: BTC
• Margin requirements: 50% cash of the contract amount
• Listed contracts: Contracts listed for six consecutive months and two additional Decembers
• Settlement method: Financially settled

Consider the following example for a CME Group bitcoin futures contract. Suppose an investor purchases two bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin, when the futures contract was purchased, is $5,000 each, meaning the total price for both futures contracts is $50,000. The margin requirements for bitcoin futures trading at CME is 50%, meaning that the investor has to deposit $25,000 as margin. She can finance the rest of the contract purchase by using leverage.

The contract’s value varies based on the price of the underlying asset (i.e., Bitcoin). The Bitcoin Reference Rate is used by CME to determine the price of bitcoin. It is the volume-weighted average price for bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.

Depending on bitcoin’s price fluctuations, the investor can either hold onto the futures contracts or sell them to another party. At the end of her contracts’ duration, the investor has the option to either roll them over to new ones or let them expire and collect the cash settlement due. Some contracts, like the ones at Bakkt and ErisX, are physically settled. This means that the investor will get final delivery of the commodity—in this case, Bitcoin—upon expiration.

In 2021, CME introduced Micro Bitcoin futures (MBT) trading. The size of an MBT contract is 1/10th of one bitcoin or 1/50th of the larger BTC futures contract. Thus, if the Bitcoin Reference Rate is set at $20,000, then the notional value of one Bitcoin Reference Rate is $400. More than 3,500 accounts traded in Micro Bitcoin futures after it was first launched.

Special considerations for trading bitcoin futures

While it has increased in volume, bitcoin futures trading is still nascent in terms of market dynamics and constituents. Therefore, it is unlike other futures trading for other asset types. Here are some special considerations that you should note while trading bitcoin futures.

• Bitcoin futures trading resembles spot markets for the cryptocurrency in that it lacks the deep pool of liquidity or sufficient number of actors in its ecosystem that are present for other commodities. Therefore, trading volumes can be low and price fluctuations can be high, especially during volatile stretches of the cryptocurrency’s price. Futures trading for other commodities can provide indicators or predict spot market prices in advance. Bitcoin futures, however, either follow spot market prices or trade at a significant premium or discount.
• The regulatory landscape for bitcoin futures trading is still unclear. As mentioned above, there are very few exchanges that offer regulated futures trading. Bitcoin futures trading offered at exchanges located outside the United States do not come under the purview of agencies situated in the country. Such situations have the potential for profits through regulatory arbitrages, but they can also result in exponential risk.
• The price for bitcoin futures is dependent on the price of a volatile underlying asset. While there is a theoretical formula to calculate the price of Bitcoin futures, several other factors come into play in a real-world scenario. Investor perception of an asset’s volatility is one. Big news events are another. With its massive price swings and bubbles, Bitcoin already has a reputation among investors for price volatility. And there is no dearth of commentary about a cryptocurrency that was originally designed to become a medium for daily transactions but has, so far, failed to fulfill that promise. All of this means that bitcoin futures are not an effective hedge against their underlying asset’s volatility.