Bitcoin futures are contracts that allow investors to gain exposure to Bitcoin (BTCUSD) without being compelled to hold the underlying cryptocurrency. They are somehow similar to the futures contracts for a commodity or stock index in that they let investors speculate on the crypto future price.
For instance, the Chicago Mercantile Exchange (CME) offers several monthly contracts for cash settlement. In that context, the investor takes cash instead of bitcoin once the contract is settled.
The first bitcoin futures contract was offered on December 10, 2017, by the Cboe Options Exchange. But, it suspended offering these contracts in March 2019. The CME launched its BTC futures platform on December 18, 2017. Apart from the standard bitcoin contracts, the exchange currently offers Micro Bitcoin futures products.
These Micro Bitcoin futures are a tenth the size of a standard BTC contract. Moreover, they also offer options on the bitcoin futures. Other platforms like Intercontinental Exchange (ICE) and Bakkt offer daily and monthly BTC futures contracts for physical delivery.
How To Trade Bitcoin Futures On TD Ameritrade
Users need first to open a TD Ameritrade account. Once the account is live, you will need to indicate that you wish to trade actively in the markets. Various permissions and qualifications are needed on the account for CME Group (CME) micro bitcoin futures trading (/MBT)SM and CME Group (CME) bitcoin futures trading (/BTC)SM.
To participate, you will need to have futures trading approval and own a non-retirement account. Notably, you will need unlimited access to /MBT and /BTC to include BTC trading in your account after the system approves the account to trade futures.
Please note that the Charles Schwab Futures and Forex LLC margin stipulation for the BTC futures products is 1.5 times higher than the exchange margin needs. Moreover, it is subject to change without any prior notice.
Funds on Ameritrade need to be wholly cleared in the account before being used for trading on any BTC futures contracts and any other crypto futures contracts. Interestingly, ACH and Express Funding strategies need up to four days for your deposits to clear. But, the wire transfers are cleared the same business day.
While all of these futures products come with distinct and massive risks, they might offer a highly regulated and stable environment to offer some form of exposure to bitcoin as a commodity too. Before investing in bitcoin futures, do a background check to determine whether your objectives, experience, financial resources, and other relevant circumstances will enable you to join this space.
Virtual currency is a digital representation of value. It works as a unit of account, a medium of exchange, or a store of value. However, these digital assets do not have legal tender status.
Digital currencies are exchanged for fiat currencies at times. However, they are not backed or supported by any central bank or government except for El Salvador that has recently recognized Bitcoin as legal tender.
The value of cryptos is entirely derived from the market forces of demand and supply. They are highly volatile when compared to traditional currencies. Losses and profits are mostly related to the market volatility and they are amplified in the margined futures contracts.
What Time Do Bitcoin Futures Expire?
All futures contracts have a limited lifespan. In the case of BTC futures, they expire based on the respective calendar cycle. The expiry date is mentioned in the contract specifications. On Binance, for example, the quarterly contracts expire in the following calendar cycle of March, June, September, and December.
In case the current front-month contract expires, the successive contract replaces it acting as the new front-month futures contract. If the current front month is September, whenever it expires, the December contracts become the new front month.
After expiry, the settlement process starts. Settlement is managed by the futures contract provider to ensure that all open positions are closed in an expiring contract. Notably, all the expired positions are settled at a price that is determined by the crypto exchange, called ‘Settlement Price’.
When Did Bitcoin Futures Start Trading?
The first bitcoin futures contract was offered on December 10, 2017, by the Cboe Options Exchange. But, it suspended offering these contracts in March 2019. The CME launched its BTC futures platform on December 18, 2017.
The main difference that exists between the CME and Cboe futures is that the Cboe contract was linked to one bitcoin while the CME contract represented five bitcoins. The Cboe also settled its futures against a price auction offered daily on Gemini, while the CME used its bitcoin reference rate that tracks many crypto exchanges.
The trading volumes in the CME contract were a bit higher than that of the Cboe in most cases before Cboe suspended Bitcoin futures trading. A senior analyst at Tabb Group consulting company, Tom Lehrkinder, said:
“CME is a little better known for futures so there may have been a comfort there. Traders may have grown more comfortable with a bitcoin futures product after Cboe’s launch.”
What Time Do Bitcoin Futures Start Trading?
The BTC futures contract trades from Sunday up to Friday from 5 p.m. to 4 p.m. Central Time (CT). In that context, the BRR aggregates the trade flow of major BTC spot exchanges in a one-hour calculation window into the price of Bitcoin in US dollars as of 4 p.m.
How Do Bitcoin Futures Contracts Work?
Since their launch in December 2017, the futures contracts have gained massive traction. They offer investors exposure to Bitcoin, in the same manner, they do to a commodity without having to hold the underlying crypto. In that context, the BTC futures contracts offer hedging and risk mitigation.
All futures get their value from their underlying security asset. Thus, BTC futures prices depend on the crypto’s spot prices. Spot prices are the market’s current prices at which BTC can be acquired or sold for instant delivery. Any move in the spot prices affects the value of the futures contracts. Although the prices move in sync with each other, there is some difference between them.
The calculation of Bitcoin futures uses a theoretical formula that is derived from the spot price:
Futures Price=Spot price ∗(1+rf−d).
where, rf = risk-free rate based on an annual basis, and d = dividend
Experts and analysts say that this formula requires some customization for two points that are specific to bitcoin. First, the change for risk-free rate changes from yearly to daily, and there is no dividend in Bitcoin. Thus, the formula changes to:
Bitcoin Futures Price=Bitcoin Spot price∗[1+rf∗(365)]
Where x = number of days to expiry
How To Hedge Bitcoin With Futures
BTC futures were introduced in 2017 by the Chicago Board of Options Exchange (CBOE) and later CME took them up. In these futures, two parties agree to trade Bitcoin at a predefined price on a particular date in the future. The futures in the bitcoin market offer a legitimate strategy for the market participants to lock in a market price.
For example, let us assume that you own a bitcoin that is currently valued at $61,000. By selling 61,000 futures contracts, you are guaranteed to trade your BTC for $61,000 in the future, irrespective of what will happen in the markets. Every contract size is equivalent to $1.
In case the market plunges to maybe $55,000, the futures position would be $6,000 in profit. But, if the BTC price surged to $66,000, you will sell your BTC for $61,000.
Understanding The World Of Bitcoin Futures Investing
BTC futures serve many purposes. Each of these purposes is unique for every participant in the Bitcoin community and network. For the miners, futures enable them to lock in prices that guarantee a return on investment irrespective of the cryptocurrency’s future price trend.
Investors and long-term traders use the futures to hedge against positions in the spot market. For instance, when an investor bets on a price surge, they might short its futures as a hedge. They stand to make a profit even if the price drops significantly. The futures are also used for short-term and long-term profits by the traders and speculators that go in and out of the futures trades.
Some advantages come with trading the bitcoin futures instead of sinking dollars into the underlying bitcoin crypto. For starters, these contracts are offered on exchanges that are regulated by the Commodity Futures Trading Commission (CFTC). This aspect gives the institutional investors some confidence to participate in this space.
Bitcoin and other cryptos trade outside the reach of regulators which makes it a highly risky asset for any institutional funds. If bitcoin futures succeed, investors and trading platforms are looking into Ether futures to provide investors with other viable alternatives to the bitcoin futures.
Secondly, since the BTC futures are cash-settled, a Bitcoin wallet is not necessary. No physical exchange of BTC happens which eliminates all risks of holding a volatile asset class that comes with steep price changes.
Furthermore, futures contracts have price limits and position limits. These limits enable the investors to mitigate risk exposure to the given asset class. As of October 2021, investors can now gain some exposure to the biggest crypto without buying or selling the futures themselves.
The ProShares’ Bitcoin Strategy Fund (BITO) currently tracks CME bitcoin futures. This exchange-traded fund (ETF) launched on October 19, 2021, becoming the first bitcoin ETF.