How to Trade Bitcoin Futures – Ultimate Guide Part 2

Cryptocurrency futures are already being traded! Do you know on which exchanges can you find them? Discover your top choices and how can you start trading in a step-by-step guide. What’s next? CME, Cboe are listing Bitcoin futures this month. 

Benefits of Bitcoin Futures Trading

As you have learned in the previous installment of this series, Bitcoin futures are an exciting new addition to the crypto portfolio.

A quick reminder: Bitcoin futures are financial derivatives – that means that by investing in them, you are not buying Bitcoin itself. You are entering into a contract with another investor saying that you will buy or sell Bitcoin to or from another party at a defined point in the future and for an agreed upon price.

Based on futures you also have options as another form of Bitcoin derivatives. An option provides you with the right to buy or sell Bitcoin later at a predetermined price – basically, you buy or sell a Bitcoin futures contract. If you expect Bitcoin prices to fall, you will want to invest in so-called put options. These allow you to sell Bitcoin later at a higher price than market price. Thus, if other investors share your opinion, the value of put options will rise.

If you expect Bitcoin prices to rise, you’ll want to buy call options – options that enable you to buy Bitcoin later at a predetermined price. If other investors expect Bitcoin prices to rise, Bitcoin call options will also become more valuable.

As you can see, you are not trading in cryptocurrency – you are just buying and selling the right to buy and sell that cryptocurrency. Thus, the transactions don’t need to be done in cryptocurrency – you can do them using fiat currency.

This alleviates some of the risks that come with cryptocurrency investing:

  • Instead of worrying about malicious attacks on your crypto wallet, or about losing your private keys, you can rely on conventional account management in fiat currency.
  • This also makes investing in Bitcoin futures and options feasible for non-crypto experts. You don’t even need to know how to set up a crypto wallet.
  • And finally, dealing in cryptocurrency is illegal in a couple of countries (China being the most prominent example), and a legal grey area (also tax-wise) in others. Those risks and uncertainties do not apply to Bitcoin futures and options because Bitcoin is basically just the underlying index. You don’t profit by buying and selling Bitcoin, but by making correct predictions about the future prices of Bitcoin.

However, the aforementioned points only apply if the Bitcoin futures are actually traded in fiat currency – not if they are traded in cryptocurrency themselves, for example as on BitMEX and Deribit.

Another feature of Bitcoin futures trading is that it allows you to invest with leverage – enabling you to realize greater profits (but also losses) with the same amount of capital. Learn more about leverage in Part 1 of our guide.

Requirements for Bitcoin Futures Trading

Before you get your feet wet in Bitcoin futures and options trading, you need to ask yourself a few questions.

Bitcoin and other cryptocurrency derivatives trading carries larger risks – but also the potential for larger returns – as opposed to cryptocurrency investing, which is itself a rather risky field of investment already. So, first you need to consider if you have any “play money” – that is, money that you can afford to lose in case things go wrong. Do not invest next month’s rent in Bitcoin futures.

Because of the volatile nature of cryptocurrencies and especially cryptocurrency derivatives, you should also be honest with yourself about whether or not you have the required time to check on your investments. Unlike traditional stocks, for example, you should not buy cryptocurrency derivatives and then just leave them alone in your account for a long period of time. You need to have sufficient time and motivation to keep a vigilant eye on your investments.

Finally, are you comfortable trading in cryptocurrency (instead of fiat currency)? Do you know how to properly secure a wallet? These question may become less important in the future when you can trade cryptocurrency derivatives with fiat money on the CME, CBOE, or the NASDAQ. But today, you need to be comfortable with crypto transactions in order to take part in this market.

Have you answered all the questions in a satisfying manner for yourself? If so then the next question is: What do you need in order to become an active Bitcoin futures trader?

  • Some minimum capital to invest (How much? See next section).
  • An exchange on which futures and options are traded. Learn more about these in the next section of this article.
  • And possibly a broker (if you wish to trade on one of the regulated exchanges in the future that enable contract setting in fiat currency) who is registered with this exchange and who will make transactions on your behalf there. Learn more about this later in the article.

Where Can You Trade Bitcoin Futures

Available Right Now

There are a couple of exchanges on which you can already trade Bitcoin futures. They are also unregulated by financial authorities – learn more about new, regulated exchanges in the section afterwards.

Because the unregulated exchanges listed in this section are not part of the financial establishment and want to avoid regulation, they have their headquarters in countries in which cryptocurrencies are unregulated as well: BitMEX in the Seychelles, OKCoin in Belize (with an office in Hong Kong), and Deribit in the Netherlands. In order to avoid attracting attention by law enforcement elsewhere, they have imposed restrictions about who may and may not open an account with them. For example, OKCoin says that they do not serve customers in Iran, North Korea, Syria, Sudan, Bangladesh, Bolivia, Ecuador, Kyrgyzstan, and the US. But since they only require a photo ID for USD deposits and withdrawals (which are currently disabled, see below), this begs the question whether these conditions are really enforced.

Of course, we absolutely do not suggest that you try it out for yourself if you live in one of the countries mentioned above. We wouldn’t dream of doing that. Not even by using a tool that hides your IP.

BitMEX

BitMEX deals in cryptocurrency only. This means that you cannot enjoy the advantages of buying and selling Bitcoin futures using fiat money and a fiat bank account that we have described above.

However, trading futures on BitMEX allows for an extremely high leverage of up to 100-fold, as opposed to the smaller potential leverage of 20x on OKCoin and Deribit (What was leverage again? Check Part 1 of our series).

BitMEX offers not only Bitcoin futures, but futures contracts of a couple of other cryptocurrencies as well: Bitcoin Cash (BCH), Dash (DASH), Ethereum (ETH), Ethereum Classic (ETC), Litecoin (LTC), Monero (XMR), Ripple (XRP), Tezos (XTZ), and Zcash (ZEC).

The names of the futures contracts are encoded using the respective coin and month and year in which they are settled. Thus, the Bitcoin futures contract settling in December (code: Z) of 2017 is called XBT Z 17.

In addition to the Bitcoin futures contract on BitMEX and the altcoins futures, there is also a special kind of Bitcoin contract available: A so-called perpetual swap contract. In contrast to a common futures contract, a perpetual swap contract does not have an expiration date. It is perpetually renewed. It traces the underlying Bitcoin price and is supposed to be less volatile than traditional futures contracts,  making it better suited for long-time investors.

The minimum investment deposit on BitMEX in general is the equivalent of 1 USD in Bitcoin (remember, BitMEX doesn’t deal in USD directly). For every product, you have to deposit the minimum margin upon the first investment (when you “open a position”), and take care that your deposit doesn’t fall under the maintenance margin. Caution: If it does, your position will be liquidated – BitMEX will sell your positions, usually at a big loss at your expense. This is known as a margin call (see Part 1 of our guide).

The lower the margins in relation to the underlying contract value, the higher the leverage is (see Part 1 of our guide). The Bitcoin futures contracts and perpetual swap contracts on BitMEX have the highest margin: Up to 100x. This is equivalent to a margin of 1%. Thus, you have to put down Bitcoin of a value equivalent to 1 USD for a position worth 100 USD.

Trading fees at BitMEX vary between 0% and 0.25%. BitMEX permits the creation of anonymous accounts. It does not have a native mobile app.

OKCoin/OKEX

The futures trading function of OKCoin’s exchange are located at their OKEX token trading platform.

Besides Bitcoin futures, OKEX offers futures in Litecoin (LTC), Bitcoin Cash (BCH), Ethereum (ETH), and Ethereum Classic (ETC).

There are three types of futures contracts that differ in regards to their expiration period: Weekly, monthly, and quarterly contracts. Weekly contracts settle on the next Friday, monthly contracts on the last Friday of the month, and quarterly contracts on the last Friday of the quarter (3-months period), i.e. of March, June, September, or December. Each contract is coded with the short name of the currency (e.g., BTC) as well as the month and day (e.g., 1229). Thus, a Bitcoin futures contract expiring on December 29 would be BTC 1229.

When starting a position, the investor can select between 10x and 20x leverage. A 10x leverage requires an initial margin of 10% of the underlying contract value – at 20x leverage, it’s 5%. Also, OKEX lets you choose between cross-margin mode and fixed-margin mode. In cross-margin mode, the margins of all your positions are taken together – thus, if you have sufficient margin on several positions and an insufficient margin on one position, the insufficient margin will be compensated and the margin call will not occur (yet). However, if the total margin falls under the maintenance margin, the margin call will risk all of your positions. In fixed-margin mode, a margin call only affects the position for which the margin has become too low.

Trading fees at OKEX are between 0.1% and 0.2%, depending on the trading volume. Currently, wire transfers for USD (for which you need a photo ID) is disabled. To signup, you need a phone number. A mobile app for iOS and Android is available as well.

Deribit

On Deribit, only Bitcoin futures and options are traded, no altcoin derivatives as on BitMEX and OKEX. Deribit exclusively accepts deposits in Bitcoin, not in fiat currency.

Deribit offers two lengths of Bitcoin futures contracts: Monthly and quarterly. They are basically equivalent to the monthly and quarterly futures described above at OKEX: They expire on the last Friday of the month and the last Friday of the quarter respectively.

The current minimum order size for Bitcoin futures at Deribit is 0.1 BTC. The initial margin is 5%, the maintenance margin is 3%. Thus, for a minimum order of 0.1 BTC you would have to put down 0.005 BTC.

Deribit’s fee structure is slightly different from the other exchanges. A so-called market taker pays 0.05% of the respective order, and the market maker actually receives a bonus of 0.02% instead of paying a fee. A market maker is someone whose order is adding liquidity to the market – that is, someone who puts up an offer for a trade for which there is currently no contract partner. A market taker is someone who becomes the partner to such a contract.

Like BitMEX, Deribit permits the creation of anonymous accounts. A mobile app for iOS is available.

In the Near Future

As you have seen, none of the unregulated exchanges that offer Bitcoin futures currently enable the settling of contracts in fiat currency. OKCoin used to offer this but has disabled the feature until further notice.

However, conventional financial service providers are also keeping a keen eye on the developments in the cryptocurrency investment space. This has led to two of the incumbents in options trading to offer Bitcoin futures products of their own: The Chicago Mercantile Exchange (CME) Group, and the Chicago Business Options Exchange (CBOE).

Bitcoin futures on these platforms are expected to be offered to start in the middle of December 2017 in – of course – fiat currency and not in cryptocurrency.: CME has just received permission from CFTC and expects their Bitcoin futures to go live on December 18. CBOE expects an even earlier start, on December 10. Because of the regulated nature of these exchanges, you cannot trade on them directly, you need a broker who is registered with them. For more details on CME and CBOE, see Part 1 of our guide.

And very recently, Nasdaq Inc. also announced that it is going to offer Bitcoin futures, probably starting in the second quarter of 2018. Nasdaq Inc. is the operator of the technology stock exchange NASDAQ. They announced that they would use approximately 50 data sources to determine the price of Bitcoin, as opposed to CME who use four data sources and CBOE who use just one (for more details on these two, see Part 1 of our guide). Other details of Nasdaq Bitcoin futures remain to be determined.

How to Start Trading Bitcoin Futures on BitMEX

BitMEX is fairly easy to use and, aside from Bitcoin futures, enables you to access a range of altcoin derivatives. Thus, we will demonstrate trading on BitMEX here.

To create an account, you only need to have a valid email address. Giving your name is not obligatory. You may, however, enable two-factor authentication later on if you want.

When you have created the account and verified your email address, you will see your trading dashboard with a real-time order book:

In order to start trading, you have to put some Bitcoin in your wallet first. Clicking the account balance on the top right of the screen (TOTAL and AVAIL) will take you to your wallet.

If you click on the “Deposit” button, your BitMEX Bitcoin deposit address will be displayed which you can use to then send Bitcoin from any other wallet.

Important: Do not send Bitcoin Cash or any other altcoin, regardless of which kind of contract you want to buy later. Your funds will be lost. Only Bitcoin (XBT) is accepted.

Once you have some funds available, you can place an order. To do this, you first select the kind of coin your futures contract should be based on. They are all listed as tabs on the top of your dashboard together with their current trend.

When you have selected a coin for the contract – for example, Bitcoin Cash – you can place the order on the left side of the screen. Of course, at the very beginning you can only buy a position (left hand side), not sell it.

You can either choose “Limit” or “Market.” With “Limit” you can choose which maximum price you are willing to pay for the position. If the market does not support this price, your order will not be executed until prices have fallen in the future.

Thus, if you are in a hurry to get your order filled, you may prefer the “Market” option. Here, you simply buy a quantity defined by yourself at the current market price:

You will find the minimum margin for each of these trades under the “Cost” button (here 0.0088 XBT).

After you have bought a position, you can see the current status of it directly under the “Place Order” box on the left. It will also tell you your “ROE” or return on investment – how much value your position has gained in proportion to your original investment.

If you think that you have made enough profit, you can sell the position again. This works exactly like buying as described above, either through the “Limit” or “Market” function.

Your wallet overview (see above) will tell you the current status of your funds and investments:

What is that?

The wallet balance is the total of your deposits plus your realized profits and losses – the profits and losses you have made with positions that you have already sold.

Unrealized profits and losses (PNL): These are the profits and losses your positions – that you have not yet sold, thus unrealized – have currently accrued.

Margin balance is your wallet balance plus unrealized PNL. This is the total equity you have with the exchange. In theory, the funds that you would have right now if you sold all of your positions immediately.

Position margin is the minimum deposit you have to keep on the exchange in order to avoid margin calls with your current positions – your total maintenance margin over all positions.

Order margin is the deposit you need to keep so that your open orders can be filled – your total initial margin over all open orders.

And finally, your available balance: You can either invest or withdraw these funds. They are yours right now.

Funds can only be withdrawn in Bitcoin through the “Withdraw” button (see above). Important: Double-check that you are sending them to a real Bitcoin address.

Conclusion

This was a short hands-on guide to show you how to trade Bitcoin futures in cryptocurrency the right away – either because you want to trade in Bitcoin or because you want to get your feet wet and later switch to trading Bitcoin futures in fiat currency when CME and CBOE have entered the game.

Happy trading!

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