Crypto futures are a popular way to trade crypto assets, enabling traders and investors to take leveraged positions in bitcoin and other cryptocurrencies without having to own the underlying asset. Read on to learn what crypto futures are, how they work, and how you can use them to trade crypto.
What Are Futures?
A futures contract is a legal agreement between two parties to purchase or sell a specific asset at a fixed price at a particular time in the future.
Futures contracts oblige the buyer to buy and receive the asset upon the contract’s expiration, just as the seller is equally obliged to sell or deliver the agreed-upon asset.
Traditionally, futures have been used to hedge price exposure, most notably in the commodity markets. For example, a cocoa producer can lock in the price at which they will sell their cocoa (to avoid making a loss if cocoa market prices drop after the harvest) by selling cocoa futures contracts equal to the amount they will produce. That way, the cocoa producer knows exactly how much they will sell their harvest for, regardless of whether cocoa prices will fall or rise.
Today, futures are also used to speculate on a wide range of assets, including cryptocurrencies, as futures contracts enable traders to speculate on the price movement of an asset without having to own the underlying. Also, futures enable traders to use leverage to potentially increase their earnings.
What Are Crypto Futures?
Cryptocurrency futures are futures contracts that have crypto assets like Bitcoin or Ethereum as their underlying assets.
For example, if an investor chooses to buy a futures contract when one bitcoin is valued at $20,000 and it increases to $40,000 per bitcoin, the investor will have gained $20,000 in profit. If at that future point in time, the price of bitcoin will be under $20,000 (e.g. $18,000), the investor will have to settle at a loss of $2,000 when the contract expires.
However, as futures trade in liquid markets, these derivative contracts are actively traded and investors are not required to hold their contracts until exposure. As a result, crypto futures have emerged as a popular alternative to spot trading, especially as crypto futures exchanges enable traders to use leverage to increase their trading positions.
How Does Crypto Futures Trading Work?
On a regulated exchange like the Chicago Mercantile Exchange (CME), a trader can open a position in a Bitcoin futures contract to buy 5 BTC. If the price of one bitcoin at the time of initiation is $20,000, the contract would total $100,000. On the CME, the trader would be required to deposit 50% of the contract amount, or $50,000. This deposit is what is known as an initial margin requirement. The remainder of the contract can be financed using leverage.
The value of the contract will be subject to the CME’s Bitcoin Reference Rate, which is calculated daily (3 PM – 4 PM London time) based on the volume-weighted average price sourced from different exchanges. The investor can then hold or sell the contract based on price fluctuations. The contract can either be renewed or ended on the expiration date.
Prior to beginning this process, an investor must set up an account with the brokerage or exchange service that will facilitate the trade. Two approvals are required: one for the account, and one to start trading derivatives through the service provider. These approvals are set in place due to funding requirements and the account holder’s level of experience with derivatives trading.
On an unregulated exchange, by contrast, account set-up requirements are not as stringent as on regulated exchanges. Leverage levels are higher, posing the possibility of significantly higher returns (and losses) for traders.
Binance, upon its futures trading launch in 2019, for example, offered leverage of 125. The company then revised this amount down to 20 times in July 2019.
The minimum amount a trader must have in their account to execute trades is known as the maintenance margin. Larger positions require higher margins to compensate for potential price drops. If the price drops below what the maintenance margin can cover, the trader will receive a margin call to top up the margin in their account. If they are not able or willing to do that, their futures position will be liquidated.
Pros and Cons of Crypto Futures Trading
- The greatest advantage offered in Bitcoin futures trading contracts is the regulated exposure to crypto assets. The regulation of bitcoin futures contracts at the CME is under the Commodities Futures Trading Commission (CFTC). It enables traders and investors who don’t feel comfortable with owning the underlying asset to still speculate on the price of bitcoin.
- Bitcoin futures enable investors to bet on the price of bitcoin without having to deal with the complexities of setting up a bitcoin wallet and securely storing their coins.
- Futures trading is only recommended for seasoned traders and investors who understand how these types of derivatives work and what risks trading them entails. Beginners will likely get burned trading futures, especially when deploying leverage in an attempt to increase their potential profits.
- If you buy a Bitcoin futures contract you don’t actually own bitcoin, which means you don’t have self-custody of “your” coins and you can’t use them to make payments. Bitcoin futures are only used for heading and speculating.
Top Crypto Futures Trading Platforms
Let’s take a look at five of the most popular cryptocurrency futures trading platforms.
The CME offers a wide range of cryptocurrency futures, enabling US investors to gain exposure to bitcoin without having to own the underlying asset. The leading derivatives exchange is regulated and provides a highly trustworthy crypto futures trading experience.
Binance accounts for $4.32 billion in bitcoin futures trading volume globally. A leader in its own right in the crypto futures trade, it has a good spot volume and liquidity, a great variety of crypto assets for trade, and notable depth in perpetual futures. Its only drawback lies in its regulatory uncertainty, as users from certain jurisdictions are restricted from using its services.
In offering 100x on leverage, Bybit is a leading futures trading platform that offers access to hundreds of cryptocurrencies. It accounts for $2.30 billion of the bitcoin futures trading volume. Uniquely, they require no KYC for users to trade crypto, are available in most countries around the world, and offer the most affordable trading fees.
Known as the fastest-growing futures trading platform, FTX offers the lowest fees coupled with deep liquidity. The exchange is secure, offers hundreds of crypto pairs for trading, and 10x leverage. Additionally, traders can lend USD and crypto to earn interest. Its major disadvantage is that some spot markets are illiquid.
In offering low trading fees of 0.10% on trades, OKX is a top-tier futures trading platform that has integrated bank accounts, digital wallets, and cards to make it easy for traders to execute transactions on the platform. It’s, however, unavailable in the US and has mixed reviews in regard to limited liquidity.
What’s the Difference Between Futures and Perpetual Swaps?
The difference between a futures contract and a perpetual swap is that the latter has no expiration date, and offers investors the ability to take on larger positions with lower margin requirements compared to futures contracts.
Introduced by BitMEX in 2016, Perpetual swaps are considered risker than futures but enable traders to potentially gain higher rewards because of the lower margin requirements and higher leverage.
Perpetual swaps must be pegged to spot prices of the underlying assets they represent. To ensure that, crypto derivatives exchanges put an anchoring system for pricing known as the funding rate mechanism. This system creates a balance by assigning incentives to traders to increase or decrease their demand for long or short positions in the perpetual swap contract.
Through the help of the funding rate mechanism, perpetual swaps trade very close to the spot price of their underlying cryptocurrency, which is another reason why seasoned crypto traders are generally fans of trading perpetual contacts. Interest in perpetual swaps has seen crypto traders exchanging as much as $180 billion in daily trading volumes.
The Bottom Line
Crypto futures trading is not for beginners. While the allure of leverage and potentially making large trading profits with little money down can be very appealing, new crypto traders need to take time to learn exactly how crypto futures (and perpetual) work in action and become comfortable with the risks before embarking on their journey into the crypto derivatives market.
And, above all, no crypto trader should ever risk more than they can afford to lose.
What Are Cryptocurrency Futures?
A cryptocurrency futures contract is an agreement between two parties to buy or sell a cryptocurrency at a specific price at a predetermined time in the future.
Where Can You Trade Crypto Futures?
Crypto futures can be traded on regulated exchanges, like the Chicago Mercantile Exchange (CME), and on unregulated crypto futures trading platforms, like Binance and OKX.
What Are Perpetuals Swaps?
Perpetual swaps, also known as perpetual futures, are essentially futures contracts on cryptocurrencies but without an expiration date. Perpetual swap contracts typically follow the spot price of their underlying asset closer than futures because of their unique fund rate mechanism that incentives traders to increase or decrease their demand for the contracts, thus keeping the price close to the spot rate.
Where Can You Trade Cryptocurrency Futures?
You can trade crypto futures on regulated derivatives exchanges, such as the CME, or on unregulated digital asset exchanges, such as Binance, FTX, and OKX.