Bitcoin Futures Trading

Bitcoin futures are a type of derivatives contract. They let you buy Bitcoin today but receive it at some predetermined time in the future.

You might sign a contract to receive one Bitcoin for $100,000 next July. If the price of Bitcoin is more than $100,000 come next July, plus any fees to make the trade, you can sell that Bitcoin for a profit. If Bitcoin is lower than $100,000, you’ll have lost money on your trade.

Why trade Bitcoin futures?

There are two main reasons why people trade Bitcoin futures.

The first is known as “hedging.” If you really need Bitcoin in a year to repay a large loan, say, you might not want to concern yourself with price fluctuations. It might be easier to buy that Bitcoin at a guaranteed price today so you can repay your loan. This might prevent you from making a slightly larger profit if Bitcoin rises above your contract price, but it can be helpful to lock in the price ahead of time.

Outside of the BItcoin market, using futures as a hedging tool is very popular with farmers, who can get a guaranteed price for their crops and can ignore price fluctuations. There are thousands of futures contracts on modern stock markets, as diverse as onions, cocoa beans, and silver.

The second reason to trade Bitcoin futures is pure speculation. It’s possible to make a lot of money by betting that the futures contract price is undervalued. If Bitcoin zips up to $200,000 instead of the $100,000 at which you bought it in your futures contract, you’ll be able to profit by selling that Bitcoin for double the price shortly after the contract matures. You would have, effectively, bought that Bitcoin at a discount.

The Bitcoin futures market is very popular because you can play with more money than you have. Futures are a leveraged financial instrument, meaning you can place larger speculative bets. You don’t need to put up 100% of the contract’s full value to place a futures trade; brokers only request initial margin accounts. These fees vary from broker to broker, and on the size of the trade.

Leveraged trading helps explain why, according to CoinMarketCap, crypto exchange Binance processed $79 billion worth of derivatives trades in the past day (as of this writing) compared to $25 billion in spot trades—simple buy and sell orders. Trading on margin makes futures far riskier, however, as if the market moves against you, the broker might request you to place more money down to fund your trade, and liquidate your position if you can’t foot the bill.

Bitcoin futures aren’t the only type of cryptocurrency futures contract; theoretically, you can create one for any coin. Binance, the largest exchange, offers eleven futures contracts for nine cryptocurrencies: Bitcoin, Ethereum, Litecoin, Binance Coin, Polkadot, XRP, Cardano, Chainlink, and Bitcoin Cash.

Different types of Bitcoin futures

Bitcoin futures are a fairly standardized product, however the world of decentralized finance provides traders with room for different options.

The first major difference is in the expiration date of the contract. Futures may expire, or mature, at different dates. Common contract maturation days are monthly, quarterly, and annually. A couple of exchanges, most prominently Binance and BitMEX, also offer something called a “perpetual” contract, which does not have an expiration date and can be held forever, theoretically, so long as the trader does not get liquidated. Perpetual futures contracts are a way of keeping a leveraged position going for a long time. They make explicit one unwritten rule in derivatives trading: Most futures contracts are created for speculative purposes, not for hedging, and are simply a way of trading on leverage.

The second major difference between Bitcoin futures contracts is whether they are physically delivered or not. In other words, when the futures contract expires, will you receive Bitcoin (“physically delivered”) or a cash equivalent? Most crypto exchanges will conduct contracts in Bitcoin, but others, like the Chicago Mercantile Exchange, will pay out in cash.

What about other derivatives contracts?

A derivatives contract is an investment vehicle that represents some underlying asset. You’re trading on a trade. Futures are far from the only derivatives product. The most similar ones are swaps, forwards and options. In crypto itself, there are dozens of “derivatives” of coins, but these tend to refer to synthetic assets that represent another asset, like a cryptocurrency pegged to the value of the US dollar or an Ethereum token that represents Bitcoin.

Leaving more complicated and novel cryptocurrency derivatives contracts aside for now, options contracts are the closest competitor to Bitcoin futures. The difference between Bitcoin futures and Bitcoin options contracts is that with futures, you have to buy the Bitcoin when the contract expires. With Bitcoin options, you can take it or leave it. This lets you quit the trade if you no longer want to buy that Bitcoin; it makes sense to do this if you, say, stand to lose money because the price of Bitcoin has tanked rather than risen.

The biggest Bitcoin futures markets

As of August, 2021, Binance is by far the largest Bitcoin futures market. It traded $31 billion at the time of this writing. The next largest is Bybit, which traded $8.81 billion, and OKEx, which traded $6.04 billion. Remember that these figures are inflated because traders can trade on margin, which means they can borrow money to bolster their spending power. CME’s Bitcoin future offering, by far the most regulated compared to crypto-native exchanges, is down in sixth place.

Are cryptocurrency futures available in Canada?

Whether cryptocurrencies futures contracts are legal is a constant source of tension in multiple trading jurisdictions. This is often because securities regulators consider the underlying asset, like Bitcoin or any of the thousands of other cryptocurrencies on the market, to be securities. It’s also because exchanges usually have to be licensed to let customers trade derivatives contracts, and they rarely are.

The Ontario Securities Commission lobbed a series of allegations against unregistered cryptocurrency companies in May and June, 2021, saying that certain exchanges like Poloniex, KuCoin, and ByBit shouldn’t offer derivatives contracts without first registering, and said it would take further action if they didn’t start discussions to register.

Here’s the OSC’s allegation against KuCoin: “KuCoin is subject to Ontario securities law because crypto asset products offered on the KuCoin Platform are securities and derivatives. KuCoin has nonetheless failed to comply with the registration and prospectus requirements under Ontario securities law.” Other warnings read much the same. Grant Vingoe, the OSC’s chair and CEO, said in a statement that unregistered crypto exchanges “expose Ontario investors to significant risks.”

Following these allegations, lots of cryptocurrency exchanges began to pull out of Ontario, or Canada, or at least limit derivatives offerings. Binance, the largest crypto exchange, cut off Ontarians completely, as did BitMEX, Kraken, Huobi and Crypto.com.

There are regulated vehicles from which to trade futures. In April, 2021, Horizon ETFs launched two Bitcoin futures ETFs, one with a long expiry and another with a short. Though these don’t function quite like regular Bitcoin futures—the ETFs invest in Bitcoin futures on your behalf—they’re a way to play the futures market.

Bitcoin futures: A bellwether of the market

One useful thing about Bitcoin futures prices, and this also applies to Bitcoin options, is that they are a useful indicator for where the market thinks Bitcoin will head in the future.

Most Bitcoin futures trading is for speculative purposes, and traders want to make a profit, so the average price of a contract that expires one year hence is a conservative estimate of the future price of Bitcoin. Of course, you could also argue that Bitcoin’s price itself is indicative of the future price of Bitcoin, just like you can argue that the current value of a stock is a projection of a company’s future earnings.

Expiry dates for Bitcoin futures and options contracts are also important because they tend to bunch up, usually on the final Friday of each month. On the final Friday of July, 2021, $58 billion of Bitcoin contracts were traded, compared with $51 billion the previous day and $33 billion the previous Friday.

Other big trading days coincide with market events. In late July, 2021, $124 billion in Bitcoin futures contracts traded on a single day after Binance stopped margin trading against the pound, Australian dollar, and the euro. The day before, $34 billion of trades were processed.

While huge expiries of Bitcoin futures can be somewhat priced in, since traders have to buy that Bitcoin, it’s less clear whether Bitcoin options traders will buy the Bitcoin secured in their contracts and dump it on the market. If they do, this can reintroduce a lot of Bitcoin back into the market. Some analysts think that this is a bad thing for the market, since it increases the number of Bitcoins up for sale. Others think that this is priced in and has no marked effect on the price of Bitcoin.