What Are Bitcoin Futures And How Do They Work

With the popularization of the cryptocurrency, crypto exchanges began to use different interesting financial tools for trading, like Bitcoin futures. This feature attracts both experienced institutional traders and completely novice investors. Let’s figure out what it is and how to use it.

What are Bitcoin futures?

In Cripto World by “futures” we understand a contract in which the buyer agrees to purchase and the seller — to sell an asset at a specified date in the future, at a price set at the time of opening. For instance, Bitcoin futures means that BTC is the asset of a deal and its price depends (although it may differ) on the value of the asset.

Three facts about futures:

• Available on most crypto exchanges.
• They allow you to maximize profits (and losses) from trading.
• You can trade crypto without actually owning it.

Futures allow to create complex trading strategies and are often used to hedge risk and maximize returns through leverage. In addition, different types of futures contracts have their own advantages and disadvantages and can be used for different purposes. So it’s worth taking a closer look at the main kinds of futures.

Types of Bitcoin futures

Various platforms may offer different types of Bitcoin futures for trading. They can change in terms of opening and execution. There are 2 main criteria that are found on most exchanges:

1. Expiration date

Usually divided into perpetual and quarterly. Quarterly futures close automatically on the last day of the quarter in which they were opened. A position in a perpetual contract can be held open as long as there are enough funds on the balance to pay the margin and funding rate. Until the perpetual futures contract is closed, the trader receives unrealized gain or loss. When the position is closed, the unrealized gain/loss turns into a realized one, which is fixed on the trader’s account.

2. Delivery

Usually divided into deliverable and settled. Deliverable futures involve the physical transfer of an asset at a specified time. For example, to execute a deliverable BTC future, the seller must actually transfer the BTC, and not just pay the price difference. Settled futures suggests to pay the difference between the delivery price and the actual spot price. For example, if a trader opened a settled futures contract to sell BTC at $16,000, and at the time of execution BTC is $18,000, then he will pay the buyer the price difference of $2,000. Neither the buyer nor the seller deal with BTC itself.

Most crypto exchanges use these characteristics for futures, but some may offer non-standard contracts, so don’t forget to check everything before opening a position.

What should you know about futures trading?

Since futures are derivatives — to work with them, you need to take into account several price indicators at once:

• The price of the underlying asset. It’s the value of the spot asset on which the price of the contract depends. For example, the price of BTC futures directly depends on the value of BTC. The exchanges usually calculate the price of the underlying asset based on data from one or more spot exchanges.
• Futures price. It’s the price of the contract when opening a position.
• Basis. It’s the difference between the futures price and the underlying asset. The basis can be positive (when the spot price is higher than the futures price) or negative (when the spot price is lower than the futures price). For example, there’s a future contract to buy BTC at $16,000, and then BTC rises to $18,000. In this case, we have a positive basis of $2,000.

All these factors complicate the calculation of possible profit/loss, especially if the trader uses leverage, but the basis must be constantly monitored, since it determines the loss or profit the trader will get after closing the position.

Benefits of Bitcoin futures trading

Although a future contract is a complex tool, it gives traders some advantages:

• Trading with leverage. Some exchanges provide leverage up to x100 and even higher, which allows you to maximize the efficiency of using the deposit and enhance the results of the transaction.
• No need to buy a physical asset. Settled contracts can be traded without owning physical assets. That is, futures are available not only on crypto exchanges (but, for example, on CME) and can be traded even in those jurisdictions where cryptocurrency is prohibited.
• Hedging. A trader can hedge against volatility by opening a futures position opposite the main position in the spot market.

Example: we have BTC purchased at $18,000 and we are worried that the price might go down. To hedge the risk, we open a deliverable futures to sell BTC (short) at $18,000. At the end of the quarter, we will sell BTC anyway and return the purchase price, and if the price goes up before the execution time, then we can simply close the position.

• High liquidity. Since futures are derivatives, their number and trading volumes are many times higher than spot ones. It is easier to sell or buy futures than a real asset, and price slippage in transactions is lower compared to spot.

Nevertheless, futures are a complex and high-risk derivative instrument: before opening a position, you need to calculate margin payments, take into account the funding rate, commission and order type for the futures contract. Well, leverage significantly increases not only potential income, but also potential losses.

Conclusion

Despite the high level of risk, futures trading on crypto exchanges is becoming increasingly popular. Derivatives stimulate the rise in prices for digital currency and contribute to its popularization. Of course, futures are more suitable for experienced traders, but if you like stock trading, then you have to start somewhere. Just think carefully about pros and cons regarding cryptocurrency investments and decide if you’re ready to join the Crypto World.

Would you like to learn more about the crypto? Then you should check out our blog! You might like our articles “What is going to happen to Solana” and “Smart contracts in real life”.

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SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.

Originally published on our Publish0x blog.

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