Category: Crypto Manual

What Are Cryptocurrency Futures?

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Futures contracts are a type of derivative where two parties wager on the future price of a cryptocurrency. They allow investors to get exposure to specific cryptocurrencies without having to buy them. Because they enable you to bet on the price rise or fall of an underlying asset, crypto futures resemble traditional futures contracts for commodities or equities.

Cryptocurrency futures are available on exchanges, such as the Chicago Mercantile Exchange and others.

The first Bitcoin futures contracts were introduced on Cboe in early December 2017, but they were discontinued shortly after. In December 2017, the Chicago Mercantile Exchange (CME) started offering Bitcoin futures contracts as well. The contracts are traded on Globex, which is an electronic trading platform; settlement is made in cash. The CME CF Bitcoin Reference Rate and the CME CF Ether Reference Rate are used to create Bitcoin and Ether futures.

A future contract is a type of derivative that trades between two investors and guesses the price of an asset at a specific date in the future.

Investors must fulfill specific unit, pricing, marginal conditions, and settlement procedures in order to participate in the deals.

Attached please find the contract details for Bitcoin futures offered by CME.

Contract unit: 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate

Price quotation: USD

Trading hours: Sunday–Friday, 5 p.m.– 4 p.m.

Product code: BTC

Margin requirements: 50% cash of the contract amount

Listed contracts: Contracts listed for six consecutive months and two additional Decembers

Settlement method: Financially settled

 

Specification details for ETH futures at CME:

Contract unit: 50 ether, as defined by the CME CF Ether Reference Rate

Price quotation: USD

Trading hours: Sunday–Friday, 5 p.m.– 4 p.m.

Product code: ETH

Margin requirements: 60% cash of the contract amount

Listed contracts: Contracts listed for six consecutive months and two additional Decembers

Settlement method: Financially settled

Consider the following example of a CME Group Bitcoin futures contract. Assume an investor buys two Bitcoin future contracts for a total of 10 bitcoins. The price of a single bitcoin when the futures contracts were purchased was $5,000, for a combined value of $50,000. For Bitcoin futures trading at CME, margins are required at 50% of the contract amount; therefore, the investor must put up $25,000 in collateral. They may use leverage to finance the rest of the purchase.

The contract’s value varies based on the price of the underlying asset (e.g., Bitcoin). CME uses the Bitcoin Reference Rate, which sources its volume-weighted average prices for Bitcoin from multiple exchanges and is calculated daily between 3 p.m. to 4 p.m London time.

The investor can either keep the futures contracts or sell them to another party based on Bitcoin’s price fluctuations. The investor has the option of rolling over the contracts, letting them expire and collecting the cash settlement, or ending them and getting a refund at the end of their term.

The process of trading Bitcoin futures is the same as that for a standard futures contract. To trade futures, you’ll need to open an account with the broker or exchange where you wish to do so. After your account is authorized, you’ll need another approval from the trading service provider in order to begin CFD trading. The later authorization is generally dependent on funding needs and the trader’s prior experience with derivatives transactions.

Several factors are instrumental in deciding the amount of leverage and margin for your trade, including:

-The value of the underlying contract traded

-Government regulations surrounding maximum legal leverage amounts at regulated exchanges or trading venues.

Unregulated exchanges differ in that they allow for excessive risk-taking with trades. For example, Binance offered a leverage of up to 125 times the trading amount when it launched futures trading on its platform back in 2019. However, by July 2021, that figure had been revised down to only 20 times the original trade amount.

Keep in mind that the higher your trade’s leverage, the more volatile it will be. So while there is potential for high profits, you also run the risk of losing a great deal of money.

The maximum volume you can trade is determined by the margin amount in your account. The term “margin” refers to the minimal collateral required for trading in an account. The greater the amount of the transaction, compared to the size of your position, the higher the margin requirement set forth by the broker or exchange to complete it.

The current exchange rate for Bitcoin futures trading is 50% margin, and 60% for Ether as of April 2022.

Not all brokerages are created equal- some have higher margin requirements than others. This can be explained by the difference in costs to provide the futures product from different companies.

For example, CME requires a base margin for Bitcoin futures; brokerages like TD Ameritrade that provide CME Bitcoin futures trading as part of their product offering can set higher margin rates above the exchange’s baseline rate.

On December 10th, 2017, Cboe Global Markets (Cboe) became the first American exchange to offer Bitcoin futures contracts. A week later, CME followed suit. According to April 2022 data from crypto analytics firm Skew.com., the most prominent Bitcoin futures trading platforms were:

Binance: The world’s most significant cryptocurrency exchange by trading volume, had a$4.32 billion impact on the total trading volume of Bitcoin futures.

Bybit: 2018 saw the launch of a derivatives trading firm that would go on to see $2.30 billion in total Bitcoin futures trading volume.

CME: The headquarters for CME is based in the United States and contributes to $2.24 billion of trading volume daily.

FTX: FTX’s popularity has grown rapidly, even though it came to the crypto trading market relatively late.

OKX: OKX is one of the world’s major cryptocurrency exchanges, with over 7.5 million users as of April 2018 and a market cap of nearly $1 billion. OKX is not accessible to customers in the United States due to regulatory strictness.

The main advantage of trading Bitcoin futures contracts is that they offer regulated exposure to cryptocurrencies. In a volatile ecosystem with wild price swings, that is a significant point.Bitcoin futures contracts at CME are regulated by the Commodities Futures Trading Commission (CFTC). This offers not only confidence but also recourse to institutional investors, who comprise the majority of traders in such contracts.

Simplicity

Furthermore, Bitcoin futures make it easier to invest in Bitcoin. The investor doesn’t need fret about money custody solutions or creating a Bitcoin wallet for security reasons when trading because there is no physical exchange of Bitcoins.

One advantage of cash-settled contracts is that you avoid the risky situation of owning a volatile asset.

Safer Than Owning Crypto

Dabbling in Bitcoin without getting burnt is safer with bitcoin futures contracts, which have position and price restrictions that allow investors to minimize their risk exposure.

Position Limits

Position limits differ depending on the exchange you’re using. For example, CME’s maximum limit for front-month futures contracts is 2,000, but it allows 5,000 contracts across different maturities. Binance has a feature that enables you to manually reconfigure your position limit based on past trading history and margin amounts – this makes it much more than other exchanges.

 

 

Bitcoin and Cryptocurrency Glossary

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ATH: Acronym for All Time High (regarding a cryptocurrencies price)

Bear Market: When the markets are falling it is said to be a bear market. This can also be applied to one particular cryptocurrency. Someone can be bullish on one cryptocurrency and bearish on another.

Blockchain: A digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly.

Bull Market: When the markets are rising it is said to be a bull market. This can also be applied to one particular cryptocurrency. Someone can be bullish on one cryptocurrency and bearish on another.

Cold Wallet: A wallet that is not connected to the internet. Examples would be paper wallets and hardware wallets.

Cold Storage: When cryptocurrency is put into a “cold wallet” that is not connected to the internet in any way, such as a hardware wallet, it is said to be in cold storage.

Fiat: Legal currency whos value is backed by the government that issued it. This is the type of currency most people are accustomed to. When someone buys bitcoin with fiat they are using their money to buy bitconi. When someone cashes out to fiat they are taking their earnings and depsoting it into their bank account.

FOMO: An acronym for “Fear Of Missing Out”. It relates to trading cryptocurrenies where a person is likely to buy into a currency while it is on an upswing or when there is a lot of hype around it without doing enough research on the project.

Fork: A radical change in the protocol that makes previously invalid blocks/transactions valid (or vice-versa), and as such requires all nodes or users to upugrade to the latest version of the software. Basically it’s kind of like a significant update to the underlaying framework.

FUD: An acronym for “Fear, Uncertainty, and Disinformation”. This is when a person is talking down on a cryptocurrency in order to get people to sell

Hodl: An internet meme that started by somebody misspelling “Hold” (as in to hold a cryptocurrency). It is often used to express ones confidence that a certain coin will increase in value and that they are not selling it any time soon.

Hot Wallet: A cryptocurrency wallet that is in some way connected to the internet, such as on an exchange or online wallet, as opposed to an offline, or “cold wallet”

ICO: Initial Coin Offering. It is a way for a new cryptocurrency to crowdfund before launching.

Limit Order: When trading cryptocurrencies you can set the price at which you wish to buy or sell a cryptocurrency. Someone has to be willing to purchase the cryptocurrency at the price you are buying/selling or else the order will not be filled.

Market Cap: The total number of coins/tokens multiplied by the current price. It is a measurement of the total value invested in the cryptocurrency.

Market Order: Instead of setting a price you can just make a buy/sell at the current market price. This is known as a market order.

Mining: Cryptocurrencies like bitcoin exist on a blockchain. Anybody can set up a “mine” and confirm transactions. In return they are paid in bitcoin that is either created or given to them in transaction fees. This is known as mining.

Moon: When a cryptocurrency’s price is skyrocketting you’ll hear a lot of people say it’s “going to the moon” or “mooning”.

Node: This is a miner that uses the full blockchain and shares blocks across the network.

Private Key: An encrypted key used to acces your bitcoin. Only the owner of the private key has access to that owner’s wallet

Public Key: Public keys are publicly sent with each transaction to confirm that it was the owner that sent it. Public keys and wallet addresses are derived from the private key but they are essentially impossible to reverse engineer to get the private key

ROI: Acronym for Return on Investment and is usually expressed as a percentage.

Satoshis: The smallest unit of measurement for bitcoin that equals one hundred millionth of a bitcoin (0.00000001 BTC). Also called a “sat”.

Segwit: Short for Segregated Witness. This is the name used for a change in the way transactions are confirmed in order to reduce block size.

Tether: USD Tether is a cryptocurrency where each coin is backed by actualy US currency. The exchange rate is typically close to 1:1.

Wallet: A place where cryptocurrency is stored. It contains your private keys which give you access to your coins.

Whale: This refers to a person with enough cryptocurrency to influence the markets. You will usually see big sell walls set up by whales who try to keep the price down so they can buy more of that currency at a lower price before it sky rockets.