Bitcoin is a cryptocurrency that emerged in the wake of the 2008-09 financial crisis. It is a decentralized digital currency, which is not backed by any central bank or government authority, and it can be sent from user to user on the peer-to-peer bitcoin network known as the blockchain, which keeps a public record of every transaction.
Although not a recognized legal tender in any jurisdiction, bitcoin has gradually gained popularity as more people accept it as a store of value and means of exchange. On the 10th of December 2017, the Cboe Futures Exchange (CFE) launched the first bitcoin futures market, which marked a major milestone in the effort to bring in the much-needed transparency, liquidity, and efficient price discovery to the bitcoin ecosystem.
Not long after, on the 18th of December 2017, the Chicago Mercantile Exchange (CME) Group, the largest regulated futures exchange in the world, launched its bitcoin futures. Both the CFE’s and the CME’s bitcoin futures allow exposure to bitcoin without having to hold any of the cryptocurrency.
But in September 2019, the Intercontinental Exchange, another major regulated futures exchange, created a cloud-based warehouse named Bakkt so as to offer physically-settled bitcoin futures.
|CME Bitcoin Futures Contract Specifications
Closest two months in the March Quarterly cycle (March, June, September, December) plus the nearest two “serial” months which aren't in the March Quarterly cycle.
Sunday-Friday 6:00 p.m. - 5:00 p.m. (5:00 p.m. to 4:00 p.m. CT)
Last Trading Day
Trading ends on the last Friday of the contract month. If that day is not a business day in both the U.K. and the US, trading will end on the day before that is a business day for both the U.K. and the U.S.
What Exactly are Bitcoin Futures?
A futures contract is a financial product that derives its value from an underlying asset. It represents a legal agreement to buy or sell the underlying on a specified future date, at an already agreed price. In the case of bitcoin futures, the underlying asset is bitcoin. The prices of bitcoin futures depend on spot bitcoin prices and reflect the expected future value of bitcoin.
As with all other futures contracts, bitcoin futures are standardized and trades on regulated futures exchanges, so there is transparency in the price discovery process, unlike the spot bitcoin market which trades over the counter.
Bitcoin futures are leveraged instruments, so only a portion of the total worth of the contract is required to trade the full contract. The minimum amount or percentage of the total worth required to carry a contract is known as the margin. On the CFE, the margin requirement is 40 percent, while the CME requires a 35 percent margin rate.
If you are a bitcoin enthusiast, all you need to start trading bitcoin futures is to create an account with any of the exchanges that offer the contract and deposit the required margin. You need not have the full dollar worth of the contract to start. Be cautious about bitcoin trading though — it can be extremely volatile and it’s easy to lose more than you invested.
Why Trade the Bitcoin Futures
Traders may trade bitcoin futures for the following reasons:
Hedging: Just like other asset futures, bitcoin futures can be a risk management tool for bitcoin traders. For example, a bitcoin miner may sell bitcoin futures to hedge against the risk of bitcoin price going down in the future, thereby locking in profit at the current price.
Speculation: Most traders in the bitcoin market trade for speculative reasons, and they could use bitcoin futures contracts to speculate on the price of bitcoin at a future date.
Arbitrage trading: Bitcoin arbitrage traders can simultaneously buy and sell bitcoin futures contracts on different platforms to benefit from any imbalance in prices.
How the Bitcoin Futures Trade
As of today, bitcoin futures are offered on the following regulated futures exchanges: the Chicago Mercantile Exchange’s electronic platform, the Cboe Futures Exchange, and the Intercontinental Exchange. The bitcoin futures offered on the CME and CFE are financially settled, but the ICE, through its Bakkt cloud-based warehouse, offers bitcoin futures that can be settled by physical delivery of bitcoin.
Apart from the well-known regulated futures exchanges, there are unregulated bitcoin exchanges, such as the London-based trading platform, CoinfloorEX, and the Hong Kong-based BitMEX, which offer bitcoin futures. CoinfloorEX offer physically delivered contracts.
On the CME marketplace, one bitcoin contract is equivalent to 5 bitcoin, as defined by the CME CF Bitcoin Reference Rate (BRR). The bitcoin futures contract trades Sundays to Fridays, from 5:00 p.m. to 4:00 p.m CT the next day. The contract is quoted in U.S. dollars and cents per bitcoin, and the minimum price fluctuation is as follows:
- Outright: $5.00 per bitcoin or $25.00 per contract
- Calendar spread: $1.00 per bitcoin or $5.00 per contract
Contracts are listed for six consecutive months and two additional Decembers. Trading terminates at 4:00 p.m. London time on the last Friday of the contract month. If that day is not a business day in both the UK and the US, trading terminates on the preceding day that is a business day for both the UK and the US.
On the CFE, a bitcoin futures contract settles for 1 bitcoin. The contract is initially listed for three near-term serial months, but the CFE may also list, up to four near-term expiration weekly contracts, three near-term serial months, and three months on the March quarterly cycle.
The ICE’s bitcoin futures contract settles for 1 bitcoin and is a daily contract, which trades on each business day in which commercial banks are generally open for business in New York. There are up to 70 consecutive eligible contract dates in a listing cycle.
Bitcoin Trading Strategies
As with most other futures markets, it’s possible to create trading strategies for the bitcoin futures. However, you may have to accept significant amounts of slippage, since the contract isn’t that liquid yet.
The image below shows some trades in the Bitcoin futures market!
Factors That Affect the Bitcoin Futures
Many fundamental and technical factors can affect the price of bitcoin futures, but the focus here will be on the fundamental factors, such as the following:
Regulatory changes by world governments: Government regulations, whether favorable or unfavorable, can affect bitcoin prices.
Inconsistencies in the bitcoin network: There have been confusions in the direction of bitcoin and the blockchain network. An example was the hard fork that led to the emergence of the Bitcoin Cash.
Mass media: The more positive media coverage bitcoin receives, the more the public will get to know about it and consider investing in it.
Demand and supply imbalances: Like any other commodity, bitcoin prices comply with the law of demand and supply.
Political events: Bitcoin prices tend to rise when there are major political crises, such as referendums and trade wars, affecting the major economies.
Bitcoin futures offers bitcoin miners a way to hedge against price volatility and provides bitcoin traders with the opportunity to speculate on the future prices of the commodity. It is offered on the CFE, CME, and the ICE.
Here is our archive with articles about other tradeable futures markets.
How do Bitcoin Futures differ from spot Bitcoin trading?
Bitcoin Futures trade on regulated futures exchanges, offering standardized contracts and transparent price discovery. In contrast, spot Bitcoin trading occurs over the counter, lacking the standardization and regulation seen in futures trading.
Why trade Bitcoin Futures?
Traders engage in Bitcoin Futures for reasons such as hedging against price volatility, speculation on future Bitcoin prices, and arbitrage trading to exploit price imbalances.
How are Bitcoin Futures contracts sized and quoted?
On the CME marketplace, one Bitcoin contract is equivalent to 5 Bitcoins. The contract is quoted in U.S. dollars and cents per Bitcoin, with minimum price fluctuations for outright and calendar spread contracts.
What factors affect the price of Bitcoin Futures?
Fundamental factors like regulatory changes, inconsistencies in the Bitcoin network, mass media coverage, demand-supply imbalances, and political events can influence the prices of Bitcoin Futures.