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How to trade Bitcoin futures online
In this beginner’s guide we cover the basics of futures contracts and how they can be used in cryptocurrency. Learn about the most important things to look out for and get your key questions answered.
Compare the best futures trading platforms
To dive right in and start trading straight away, use one of the brokers below. These are some of the best platforms in the industry and you can use the links in the table to get started. Otherwise, keep reading to find out more about futures contracts.
How to trade futures – a step by step guide
When you trade a Bitcoin future you are agreeing to buy Bitcoin at at the agreed price at a later date. Futures are often used as a means to speculate on how the price might perform over time and often involves leverage, a feature where you borrow money from your broker to open up much bigger trades than your deposit would normally allow. Here is a list of steps to take to open up your first futures position.
- Sign up for a trading platform. The first thing you need to do is find a broker or exchange that offers futures trading. When you’re choosing the best BTC broker, you should prioritise options that charge low fees for each trade.
- Deposit money. Next you have to fund the account. You can do that by making a deposit via a bank transfer or debit/credit card. If you’re using an exchange that only accepts cryptocurrency then you need to connect your wallet to the account and transfer money from there.
- Decide on a trading plan. You need to set parameters for how you want to trade. That means choosing how much risk you’re willing to accept and how large you want your positions to be. It’s better to start with small amounts and use limited leverage until you have more experience.
- Research the factors that affect Bitcoin. The latest news and market analysis can help you decide how you expect the cryptocurrency to perform. Similarly, you might want to see how other traders expect the market to go so that you can decide what sort of contract to invest in.
- Choose a contract length. Shorter contracts that last only a month are the least risky options to begin with. Investing in longer term contracts that expire in three or six months introduces more uncertainty but gives more time for the price to fluctuate.
- Execute the trade. Now you just need to decide what sort of position you want to take and trade the contract itself. You can go long (buy) or short (sell) depending on how you expect the market to move.
What are Bitcoin futures?
Agreements to buy or sell Bitcoin at a fixed price at a set date in the future. Buying a futures contract constitutes a binding agreement to make the trade at the specified price when the contract expires.
Futures contracts come with a standardised set of features. They have a set length and contain the exact amount of Bitcoin to be exchanged when that time is up. So you might take on a contract that obligates you to buy 1 BTC at $30,000 in 30 days’ time.
They also specify how the contract will be settled. In the commodities market, it’s possible to take physical delivery of things like oil and gold (although it certainly isn’t advised) on the expiry date. As far as Bitcoin is concerned, they’re almost always settled by one party paying the other the cash value of the trade.
How do futures contracts work?
By securing a set price of an asset they protect you against big swings in value. If Bitcoin is currently trading at $30,000 and you expect it to go up to $40,000, you can buy a futures contract to ‘lock in’ the current price and the seller would have to fulfil the order when the contract comes due.
The price of a futures contract varies depending on how long it is. The shortest contracts that execute in just a month’s time are likely to be available to buy at a similar price to the current market price. Contracts that expire in a year include a lot more uncertainty and might be available at a dramatically different price.
This type of trading has long been used for commodities, where contracts can be used to guarantee a future price for crops like wheat or corn. Those are useful because they reduce the risk for the farmers who grow them. Bitcoin futures can be used in a similar way, to hedge the risk of coins you own already, or simply as a means of speculating on future changes in price.
Things to look out for
Before you start using futures you should familiarise yourself with the most important things to look out for. Here is a list of factors to consider before you dive in.
Contracts come in fixed lengths and there are normally 1-month, 3-month, or 6-month options. The longer time frame you choose, the riskier the investment, as that leaves a lot of time for things to change, particularly with a volatile asset like cryptocurrency.
Some platforms also offer perpetual contracts. These are a special type of future with no expiry date and tend to only be available through a cryptocurrency exchange. They are most often used by traders who want to hold extremely leveraged positions and are not recommended for beginners.
Leverage is a form of trading where you don’t have to put up the full value of the trade yourself. Instead, you put up a small amount as the ‘margin’ – such as 10% – and borrow the rest from your broker. In that example, you would be using 10x leverage to make the trade and borrowing 90% from the broker.
How much leverage you can use varies depending on the platform. Some let you use 50x or even 100x leverage, but often you can only unlock those options by trading a certain amount beforehand or proving you have enough collateral to make up the total trade value if necessary.
Most brokers charge a fee or commission on every trade. That’s because they play the role of a marketplace, where people who want to buy or sell futures come and the broker has to match them all together. They’re also the ones you borrow money from when you use leverage.
The exact fee structure depends on which platform you use. Some charge a flat fee while others go for a percentage of the overall trade value. More often it’s the former and we have seen them range between less than $1 to about $2.50 per trade.
Bitcoin futures are settled in cash or a cash equivalent when the contract expires. Most of them are paid out in USD but you can also find contracts that are settled in other cryptocurrencies, including stablecoins like USDT, if you use an exchange platform like Binance or BitMex.
Liquidation is when your broker closes your position automatically because it has become too risky. It happens when you use leverage to open big trades and then the price moves against you. You lose the entire value of your margin deposit if you are liquidated.
Whenever you have an open position that uses leverage you’ll be able to see the liquidation price. Usually, it will be the Bitcoin price minus the value of your initial deposit. So if you bought a contract at $30,000 using 10x leverage (i.e. putting down $3,000) then the broker might intervene if the price were to drop below $27,000.
You can protect yourself by making sure you don’t use all your money to open a single position, don’t use too much leverage, and always keep extra funds in your account. Rather than liquidate you, the broker might simply demand you put down more collateral first during particularly volatile periods. (this is known as a ‘margin call’).
Alternative cryptocurrency futures
You might want to find a broker that lets you trade other cryptocurrency futures as well. Ethereum futures are relatively easy to find, but if you want to speculate on smaller coins like XRP or Litecoin then you need to use a dedicated cryptocurrency exchange.
Quick answers to key questions
Should I use leverage to trade futures?
Leverage is a common feature in the futures market but as beginner, you should stick to making trades that are just two or three times the value of your deposit to start with. It’s a very risky way to trade that opens up the potential of suddenly losing all your money if the market moves against you.
What’s the difference between a futures contract and an options contract?
They’re similar but an option simply represents an opportunity to buy an asset on a fixed date rather than the obligation to. In both cases the price is agreed in advance but you might pay a little more for the option because you don’t have to activate it.
Are Bitcoin futures safe?
Futures are a regular feature of financial markets and are safe to use. In cryptocurrency, however, they can be more risky because prices are much more volatile. This is particularly true if you choose to use leverage, where you can lock yourself into big trades at a price that ends up being substantially different from market value.
Should I trade Bitcoin futures now?
That’s up to you. They can be a useful tool for experienced traders who want to speculate on the cryptocurrency markets. Beginners might want to stick to buying or selling Bitcoin at the market rate first. It’s worth waiting until you learn more before you start using features such as leverage, which can expose you to particularly risky positions.
To help you choose whether to invest in a futures contract, here is a summary of the pros and cons of doing so.
- They offer the chance to speculate on price changes months or even years in advance
- Futures are a different way to trade the Bitcoin market
- Derivative options like this make cryptocurrency more like established financial markets
- You can use futures to hedge existing positions against big price swings
Where can I learn more?
Invezz has a wide range of resources to help you start your investing journey. Follow the latest news to stay up to date with the fast-moving world of crypto, take one of our courses to learn more about the basics of the blockchain, or explore the many different ways to invest in Bitcoin itself.
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Fact-checking & references
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