Pros, cons, and mechanics of Bitcoin futures trading

One such instrument is the Bitcoin futures contract. It allows traders and investors to trade cryptocurrency with leverage and protect themselves against declines in Bitcoin's price and high volatility.

What is a Bitcoin futures contract?

A futures contract is a derivative financial instrument that tracks the value of an underlying asset — in this case, Bitcoin. It is a trading agreement that allows for the purchase or sale of an asset at a specified price on a future date. The underlying asset can be anything: cryptocurrencies, stock indices, shares, gold, or oil.

Bitcoin futures imply the delivery of the underlying asset at the end of the term, but they can also be cash-settled only.

Most often, Bitcoin futures are used for the following purposes:

• Protection against significant price fluctuations (a risk hedging strategy in trading);
• Generating profit or reducing risk in the event of a Bitcoin price crash;
• Increasing trade volume (by using initial margin and leverage);
• Speculation and scalping (margin trading makes it possible to increase profit even with minor price changes significantly);
• Earning higher returns from arbitrage (trading on price differences between exchanges or trading pairs);
• Creating a Bitcoin ETF by institutional players such as hedge funds.

How do Bitcoin futures work on the exchange?

Futures allow the price of an asset to be fixed at a certain point in time, with the actual settlement occurring in the future. In other words, the investor enters into a buy or sell agreement now, and the actual asset is delivered after a specific period — known as the contract's expiration date.

Here's how it works: an investor enters into a futures contract to sell Bitcoin at $100,000 with delivery in six months. Even if the price of Bitcoin is $80,000 on the expiration date, the asset will still be sold for $100,000, resulting in a profit for the investor.

However, Bitcoin will be sold at the same price even if, at the time of delivery, it costs $120,000 — in that case, the investor misses out on the additional gain.

Advantages and disadvantages of futures compared to direct Bitcoin exchange

Unlike directly buying or selling the asset, futures give traders more flexibility. Investors can profit not only from the asset's growth but also from its decline.

Additionally, futures trading allows the use of leverage, which significantly increases the trade size. This makes it possible to open prominent positions even with a small deposit. For example, with x2 leverage, the investor doubles the trade amount using borrowed funds.

However, the use of leverage also increases risks. This is because when borrowed funds are used, and Bitcoin reaches a certain price level, a margin call is triggered — a warning that if the price continues to fall or rise, the position may be forcibly closed.

If Bitcoin's price reaches the liquidation level, the trade will be forcibly closed, and the allocated funds will be written off in favor of the lender — which could be other investors, the exchange, or a broker.

The leverage ratio depends on the specific exchange or broker and can range from 1:1 to 1:500 or even higher. The higher the leverage, the closer the liquidation price is to the entry price. For example, if a trader opens a short position on Bitcoin at $100,000 with x100 leverage, the liquidation price will be around $101,000. In other words, with such high leverage, the trader would lose the entire amount allocated to the trade if Bitcoin's price increases by just 1%.

Liquidation can be avoided by using cross-margin, where the collateral for leverage is taken from the exchange or broker account balance. However, this also increases the risks.

Another advantage of using Bitcoin futures is that there's no need to store the underlying asset or have a wallet. This dramatically simplifies investor interaction with cryptocurrency and eliminates risks such as losing funds due to transfer errors. However, in this case, investors must trust their funds to trading platforms.

What Bitcoin futures exist: ticker symbols and trading platforms

• CME Bitcoin futures, launched back in 2017 (Chicago Mercantile Exchange);
• Regulated Bitcoin futures on the CBOE (Chicago Board Options Exchange) with margin trading, also traded since 2017;
• Futures contracts on the iShares Bitcoin Trust ETF (IBIT), launched by the investment giant BlackRock.