Bitcoin futures: what is it, how it works, exchanges for trading Bitcoin futures contracts

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Bitcoin futures is a contract between two parties to sell or buy cryptocurrency at a specific date and time at a specific price. Futures have been used in the investment world for many years, but they entered the crypto sphere recently. Many exchanges have expressed their interest in launching this type of trading product.

In the review, we will analyze in detail what Bitcoin futures are, what they are used for, how they work, and the basic concepts from the specification. Here is a list and overview of 15 cryptocurrency exchanges, including regulated ones, where trading in futures contracts is available. The most liquid of them is Bitmex. There are available: quarterly, weekly and perpetual contracts for cryptocurrency derivatives.

In continuation: the best exchanges for margin trading.

What is Bitcoin Futures

The peculiarity of futures is that after the expiration of the term stipulated in the contract, the cryptocurrency is bought / sold at a given price, even if the real exchange rate has changed. Each futures contract is concluded for a specific number of assets.

Bitcoin futures allow one to speculate on the estimated price of a coin without actually owning it. The principle of operation is the same as for traditional investment assets. A trader can go long if he expects Bitcoin to rise; if BTC already exists and the rate is expected to fall, then you can take a “short” position to mitigate potential losses (hedging).

One of the benefits of Bitcoin futures is the ability to trade them on certain regulated exchanges. This is a good opportunity for those people who are worried about the legality of working with crypto exchanges. Another important advantage is that you can make money on changes in the price of Bitcoin without the need to store coins.

What are futures for

Futures are used to make money on speculation and for hedging.

Speculation is making a profit from changes in the value of Bitcoin, and hedging is reducing the risks associated with currency volatility. During hedging, the trader takes a position that, in the event of a sharp fall in value, would compensate for the loss. Thus, the balance between profit and loss is carried out. As for speculation, their main goal is to generate income from bets in the direction in which the Bitcoin rate will move.

Key points:

✅  Hedgers reduce their risks, but also significantly limit profits.

✅  Speculators trade on their guesses about where they think the market will move. For example, if a trader believes that at the moment the value of an asset is overstated, then he can put futures at a lower price, and after a decrease, buy the asset and thereby make a profit.

✅  Speculation is extremely risky, vulnerable to a fall and rise in the market.

Hedgers are trying to mitigate the risks associated with volatility and uncertainty, and speculators are betting the opposite of market movement to try to profit from cryptocurrency price fluctuations.

Types of futures contracts

There are two types of Bitcoin futures:

✅  Delivery. This is a contract, according to the terms of which, after expiration (execution), the buyer is obliged to purchase, and the seller is obliged to give the specified number of coins. The price for delivery is the one that was set at the last moment of trading. If the buyer does not receive their assets on time, then the exchange imposes fines.

✅  Estimated. This is a financial instrument that does not involve the transfer of cryptocurrency directly. Used for speculative purposes only. The calculation is carried out in relation to the difference between the value specified in the contract and the real one, which takes place at the time of expiration.

Both options have common features: their parameters are indicated in the contract specification established by the exchange, and both parties involved are liable to the exchange up to the expiration of the futures.

How Bitcoin Futures Contracts Work

Bitcoin futures is a commitment to sell or buy BTC in the future. Here’s an example of how it works:

Suppose the current Bitcoin rate is $ 10,000. The trader believes that in the future the price will increase to $ 12,000. He buys perpetual or quarterly contracts in anticipation of the rate growth. Thus, he acquired the obligation to buy BTC at the market price at the time of the expiration of the contract.

If the rate reaches the level set by the trader, then he will profit from the sale of contracts (he can also hold the perpetual futures for some time if it is obvious that the price will rise further). However, if the rate does not reach the target and falls below the purchase price, then the trader receives a loss.

You can buy and sell BTC futures at any time and make money on both downtrends and uptrends.

Bitcoin futures exchanges

Consider cryptocurrency exchanges that provide the ability to trade Bitcoin futures.

Bitmex

BitMEX is a trading platform that gives traders access to Bitcoin futures contracts: perpetual, weekly and quarterly. Provides many auxiliary trading tools and a comprehensive API. Designed by financial professionals with years of experience.

Bitcoin Perpetual Contracts are a derivative product similar to traditional futures, but with slightly different specifications. The main difference is the lack of an expiration date.

  • Contract designation – XBTUSD
  • Type – executed in XBT, quoted in USD
  • Expiration date – unlimited
  • Initial and maintenance margin – 1%; 0.5%
  • Margin leverage – up to 100x
  • Contract size – $ 1
  • Funding interval – 8 hours
  • Commission – maker -0.025%, taker 0.075%

BitMEX also supports working with quarterly futures for the Bitcoin cryptocurrency, the execution period of which is three months. Currently, two such types of futures are open: XBTU19 (expiration on September 27, 2019) and XBTZ19 (December 27).

The next type is weekly futures. XBT7D_D95 (contract down) adjusted every 7 days. Its opposite is XBT7D_U105 (contract up), which is also updated once a week. Allows the owner to participate in a potential increase in the underlying trading asset. Up contracts can only be long.

Bybit

Bybit is a cryptocurrency derivatives trading platform with 24/7 multilingual customer service, advanced order placement and fast transaction speed.

Supports BTCUSD perpetual contract.

  • Contract designation – BTCUSD
  • Type – executed in BTC, quoted in USD
  • Expiration date – unlimited
  • Initial and maintenance margin – 1%; 0.5%
  • Margin leverage – 100x
  • Contract size – $ 1
  • Funding interval – 8 hours
  • Commission – maker -0.025%, taker 0.075%

Deribit

Deribit platform specializes in Bitcoin futures and various options trading strategies. Powered by the superfast TRADE MATCHING ENGINE via a mobile or desktop interface.

BTC Perpetual Perpetual Contract Specification:

  • Contract designation – Deribit BTC
  • Expiration date – unlimited
  • Initial and maintenance margin – from 1%; from 0.575%
  • Margin leverage – 100x
  • Contract size – $ 10
  • Funding interval – 24 hours
  • Commission – maker -0.025%, taker 0.075%

As for monthly contracts, for example, BTC Options BTC-25OCT19, their expiration date falls on the last Friday at 8:00 UTC.

Binance

Binance Exchange plans to open Bitcoin futures trading soon. Two test trading platforms will be launched at once, and then for several days the management will monitor the progress of trading on both.

The maximum leverage is up to 20x with the prospect of increasing in the future.

Kraken

Kraken offers futures contracts for Bitcoin and a number of other cryptocurrencies (quarterly, monthly, and perpetual).

Specification:

  • Contract designation – BTCUSD
  • Expiration date – unlimited, monthly, quarterly
  • Margin leverage – 50x
  • Contract size – $ 1
  • Commission – maker -0.02%, taker 0.075%

Bitforex

Bitforex is one of the ten world leaders among crypto exchanges offering users safe and convenient cryptocurrency trading services. Differs in constant adaptation to market conditions, the introduction of new functions.

On Bitforex, Bitcoin perpetual contracts are referred to as BTC / USD. Their specification:

  • Contract designation – BTC / USD
  • Expiration date – unlimited
  • Initial and maintenance margin – from 1%; 0.5%
  • Contract size – $ 1
  • Funding interval – 8 hours
  • Commission – maker 0.04%, taker 0.06%

Xena Exchange

Xena Exchange – this platform from a Russian developer allows you to buy and sell both cryptocurrency and derivative contracts for it. In particular, she was the first to integrate the trading of the GRAM token contract from Telegram.

Perpetual contract specification:

  • Contract designation – XBTUSD
  • Type – executed in XBT, quoted in USD
  • Expiration date – unlimited
  • Initial and maintenance margin – from 5%; from 1.25%
  • Margin leverage – up to 20x
  • Contract size – $ 1
  • Commission – maker -0.025%, taker 0.07%

Gate

Gate is a cryptocurrency exchange that has been operating since 2013 and offers all the main functionality that traders and investors are interested in in one way or another.

Bitcoin Perpetual Futures have the following specification:

  • Contract designation – BTC / USD
  • Type – executed in BTC, quoted in USD
  • Expiration date – unlimited
  • Maintenance margin – 0.5%
  • Margin leverage – 3x
  • Contract size – $ 1
  • Funding interval – 8 hours
  • Commission – maker -0.025%, taker 0.075%

Delta.Exchange

The exchange allows you to trade quarterly futures and perpetual contracts on Bitcoin and the most popular altcoins with high leverage. It guarantees high liquidity in any market conditions.

  • Contract designation – BTCUSD
  • Type – executed in BTC, quoted in USD
  • Expiration date – unlimited
  • Initial and maintenance margin – 1%; 0.5%
  • Margin leverage – 100x
  • Contract size – $ 1
  • Funding interval – 1 minute
  • Commission – maker -0.025%, taker 0.075%

The quarterly contracts BTCUSD_27Sep and BTCUSD_27Dec are available for trading.

Kumex

A trading platform from the Kucoin exchange that allows you to sell or buy contracts on BTC with leverage.

  • Contract designation – XBTUSDM
  • Type – executed in XBT, quoted in USD
  • Expiration date – unlimited
  • Initial and maintenance margin – 1%; 0.5%
  • Margin leverage – 20x
  • Contract size – $ 1
  • Funding interval – 8 hours
  • Commission – maker -0.025%, taker 0.06%

BaseFex

BaseFEX is a platform for trading professional perpetual contracts for Bitcoin, Ethereum and other cryptocurrencies. Offers Bitcoin futures against USD and USDT.

  • Contract designation – BTCUSD
  • Type – executed in BTC, quoted in USD
  • Expiration date – unlimited
  • Initial and maintenance margin – 1%; 0.5%
  • Margin leverage – 100x
  • Contract size – $ 1
  • Funding interval – 8 hours
  • Commission – maker -0.02%, taker 0.07%

To Tether:

  • Contract designation – BTCUSDT
  • Type – executed in USDT, quoted in USDT
  • Expiration date – unlimited
  • Initial and maintenance margin – 1%; 0.5%
  • Margin leverage – 100x
  • Contract size – 0.01 BTC
  • Funding interval – 8 hours
  • Commission – maker -0.02%, taker 0.07%

FTX

FTX is a cryptocurrency derivatives exchange designed by “traders for traders”. The creators strive to make a sufficiently powerful platform for professional trading corporations, but at the same time quite intuitive for beginners. Offers a maximum leverage of 20x.

Supports perpetual and quarterly contracts:

  • unlimited BTC-PERL;
  • quarterly BTC-0927;
  • quarterly BTC-1227 (next quarter).

FTX futures differ from others in that they are stable: stablecoins are used as collateral. Positions are easy to move by using the same currency for collateral.

Quarterly futures always expire on the last Friday of the quarter. Funding interval – 1 hour. Contract size 0.001 BTC.

US regulated Bitcoin futures exchanges

In the US, the cryptocurrency industry is very wary. Therefore, the use of exchanges approved by regulators and operating completely legally is gaining relevance.

CME (Chicago Mercantile Exchange Group)

The platform is considered one of the widest and most diverse derivatives markets in the world. Provides the ability to trade futures, options, currencies and OTC market assets. Gives access to effective risk management in each of the major asset groups.

At the Chicago Mercantile Exchange Group (CME), Bitcoin futures trading is now breaking all records. Tim McCourt, CEO of the company, notes that now, in general, the optimal period for working with futures and crypto assets in general.

Bakkt

The Bakkt cryptocurrency platform, based on the results of negotiations with interested partners, will launch the ability to trade Bitcoin futures from September 23, 2019. Two types of contracts will be offered:

  • with daily payments;
  • with monthly calculations.

Futures contracts will be ICE Clear US margined, including initial and variation margins. This approach makes risk management very effective, it is used in the world markets for gold and oil, as well as stock indices.

LedgerX

The cryptocurrency derivatives platform at the end of July 2019 became the first American project in the world to launch the ability to trade options and futures. For this, a special platform was opened – Omni.

We are talking specifically about deliverable futures: therefore, after the expiration of contracts, traders do not receive fiat, but real Bitcoin. You can also make a purchase using cryptocurrency.

History: how futures came to be

Traces of futures trading can be seen as far back as 1750 BC in Mesopotamia. King Hammurabi’s legal code mentioned that goods and assets should be delivered at an agreed price in the future, based on a written contract.

If we talk specifically about financial exchange-traded futures, they have been actively used since the 1970s. Previously, mainly trade in them was associated with agricultural products, and in 1971 there was a turning point in the industry – the abolition of the gold standard for currencies. Market leaders immediately realized that the principles of trading currencies were now no different from trading commodities. Therefore, futures can also be used here.

The concept received support from economists, and they were not mistaken – soon currency futures became an integral part of international finance.

Basic concepts

Key terms related to the topic of Bitcoin futures:

  1. A contract specification is a document approved by a cryptoexchange, which discusses most of the contract parameters that are important for traders.
  2. Expiration – the expiration of the term of the futures contracts (futures and options) on the crypto exchange, the fulfillment by both parties of the obligations under the derivatives contracts.
  3. Initial margin is the amount that the exchange wants to see in the trader’s account at the time of opening a position for each futures contract opened by it.
  4. Maintenance margin – the minimum amount located in the trader’s account to maintain an open position for each contract after the first clearing.
  5. Funding is a concept common on peer-to-peer (p2p) exchanges that helps support both shortists and longists. Once in a certain period of time (usually 8 hours), a redistribution of funds occurs, during which finances are transferred to the weak side from the strong. For example, if the shorts are dominant, then they pay the longists and vice versa.
  6. Leverage – shows how many times the exchange is ready to increase your funds in order for you to make a larger deal. Leverage is a loan and you have to pay interest on the time it is used.
  7. Labeling price. All contracts created on the exchange are marked depending on the PNL (profit / income ratio) and the level of liquidity. The price of the marking helps in determining the listed parameters.

Conclusion

Bitcoin futures trading provides investors with a number of significant advantages and by all indications will continue to develop actively. This is partly due to the fact that regulators are increasingly loyal to BTC.

Many platforms have long offered functionality for trading futures contracts, and the launch of the Bakkt platform is another serious step forward for working with institutional investors, for whom the legality of every action is important.

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