Bitcoin continued going mainstream last year, when future contracts for the cryptoasset were first offered by two exchanges — CBOE, and the CME Group. Incidentally, the CME Group is the world’s largest futures exchange.
Both these exchanges now enable the larger institutional investors to get in on the Bitcoin game through a more regulated, transparent and liquid market. Since Bitcoin is a virtual currency, settlements will be cash-based and in U.S Dollars.
Moreover, unlike cryptomarkets, where trading is an all-day long affair, the futures market is has daily time restrictions. So even trading in crypto futures will be restricted to regular trading hours (7 hours a day approximately) — and to 6-days every week. Besides these small rules, there a few other constraints as well.
Here’s a step-wise guide to investing in Bitcoin futures:
Decide on an appropriate exchange
Not all bitcoin exchanges offer futures contracts. The first step to being able to trade bitcoin futures is to find an appropriate exchange that suits your style of trading. BitMEX, CBOE, Deribit, and many other exchanges offer bitcoin futures, with new exchanges appearing all the time. The best cryptoasset exchanges available not only offer just the right mix of features to facilitate buying and selling but also boast of a good reputation within the community, charge low fees and have an easy account verification process. A users’ specific needs will vary depending on his/her cryptoasset investment plans, geographical location and even the payment methods offered by the exchange.
When selecting an exchange, it is important to research and ensure the exchange offers adequate security coverage and protection against fraud and theft. The ideal way to select an exchange for all future transactions would be to shortlist a few based on the availability in your location and your investment plans. Then thoroughly research each of them on their features and reputation. You could even head to some reliable articles on the Internet.
Create a valid account and prepare it for trading
Once you select an exchange, you’ll have to create an account. Just follow the exchange’s setup procedure. Enter your details regarding personal identity and investment interests. As a trading account holder, you’ll have to then, populate the account with funds. In many cases, this is done via a bank or wire transfer, or a transfer from a different exchange. While some exchanges may allow purchase of bitcoin futures contracts with other crypto assets — like the altcoins you may already own, many others will allow you to purchase them using fiat currency.
Understand the contracts and other details
One important thing to note about contracts is that Bitcoin futures contracts can’t be hacked or stolen like some of the crypto-coins can. They are traded on a regulated exchange. This is compelling for those looking for long-only exposure (i.e. buying futures contracts) to bitcoin versus those simply trading (i.e. looking to sell) the contract. Futures contracts allow users to hedge positions and mitigate risk.
Bitcoin futures are typically associated with miners, who depend on the bitcoin’s price for their income. Exchanges like OrderBook offer a standard contract size for a futures purchase, with typical instruments including the exchange between bitcoin and the fiat currency as well as information about the month and year for the contract. While the standard contract size (or tick size) is $10, an investor can buy as many contracts to decide on his position.
A typical instrument would be represented in the form of some key-terms like, BTC/USD-3.17. Here — “BTC/USD” refers to the exchange rate between Bitcoin and the US dollar. The “3” represents the month — in this case March, and “17” denotes the year 2017. The trading symbol will be a series of alphanumeric characters, BUH4. Each month has a trading symbol — like March is H (as per Chicago Mercantile Exchange), the “B” is symbolic of BTC and the “U” is taken from USD. Here, the digit “4” signifies the year.
As an example, if the price is $500/BTC in the futures market, an investor would have to buy 50 futures contracts, each worth $10. If he/she wishes to open a positive position then the most appropriate decision would be in going long with “buy” contracts. On the other hand, he/she would go short with “sell” contracts if he/she decides to open a negative position. An investor’s position can be either positive or negative for the same instrument.
The decision to make a long-term or a short-term investment will depend on one’s opinion on the trend of Bitcoin’s price. If it is likely to climb or to fall by the set time specified by the futures contract, it will affect the sentiment around Bitcoin futures trading accordingly.