How To Trade Bitcoin Futures

Since its launch circa 2009, Bitcoin (BTC) has been the benchmark of the cryptocurrency asset class. Active crypto traders from Japan to New York have bought and sold BTC in a variety of markets, namely the physical and cash exchanges. Over time, a multitude of new Bitcoin futures products were introduced to the financial world.

Market participants are able to trade digital assets on a variety of platforms. The most popular platforms include cryptocurrency exchanges, contract-for-difference (CFD) vendors, zero-commission brokerages and standardised futures exchanges. For many blockchain enthusiasts, Bitcoin futures contracts are a preferred mode of trade.

What Are Bitcoin (BTC) Futures?

Bitcoin is a decentralised, peer-to-peer payment system that utilises the technological framework of the blockchain. Invented by an anonymous programmer(s) under the pseudonym "Satoshi Nakamoto," BTC is the gold standard of cryptocurrencies. As of spring 2021, BTC's market capitalisation had eclipsed US$1.0 trillion, reaching this level many times faster than tech sector titans Amazon and Microsoft.[1] The robust valuation of Bitcoin prompted many in the financial sector to deem the cryptocurrency asset class the future of finance.

Bitcoin futures are standardised, exchange-traded contracts based on the value of BTC itself. Each contract is a legally binding agreement between a buyer and seller to financially settle the value of a specified quantity of BTC on some forthcoming date in time. BTC futures contracts offer speculators and hedgers a variety of avenues by which to pursue profit or manage risk.

The premier trading venue for Bitcoin futures is the Chicago Mercantile Exchange's (CME) electronic Globex platform. Owned and operated by the CME Group, the CME Globex is the world leader in the provision of commodity, equities index and cryptocurrency derivatives. For Bitcoin, the CME Group offers two primary products: full-sized Bitcoin and Micro Bitcoin futures.

CME Full-Sized Bitcoin Futures

Launched by the CME in December 2017[2], Bitcoin futures were one of the first commitments made by mainstream finance toward crypto. At the time, no formal BTC exchange-traded fund (ETF) or crypto-oriented mutual fund existed. The only other standardised BTC derivative product was the Chicago Board Options Exchange (CBOE) BTC futures offering. Subsequently, the CBOE BTC contract proved to be short-lived as it was delisted in 2019.[3]

Before deciding to trade Bitcoin futures, it's a good idea to become familiar with the contract specifications. Below is a brief look at the key specs for CME Bitcoin futures[4]:

  • Symbol: BTC
  • Market: CME Globex
  • Size: 5 Bitcoin, as defined by the CME CF Bitcoin Reference Rate (BRR)
  • Denomination: U.S. dollars and cents (USD) per Bitcoin
  • Minimum Tick: US$5.00 per Bitcoin
  • Tick Value: US$25.00 per tick
  • Listing: Monthly for six consecutive months and two added December months. If the initial six consecutive months include a December, then only one added December contract month.
  • Settlement: Financial
  • Trading Hours: Sunday through Friday, 6:00 PM EST through 5:00 PM EST. One daily 60-minute break from 5:00 PM EST to 6:00 PM EST.

The debut of CME BTC futures was largely muted, as prices closed down 2% for the initial session.[2] Over time, public interest continued to grow as investors sought exposure to crypto through a standardised, exchange-based instrument. As of Q4 2021, it was common for the average daily trading volume of BTC futures to exceed 7,500 contracts.[5]

CME Micro Bitcoin Futures

On 3 May 2021, the CME Group officially launched its Micro Bitcoin futures contract.[6] At 1/10th the size of the CME's standard BTC offering, Micro Bitcoin futures are designed with the retail trader in mind. The 5 BTC quantity, high margins and US$25.00 tick value of standard Bitcoin futures proved too expensive for many in the retail market. By offering the Micro BTC contract, the CME hoped to attract not only crypto beginners, but seasoned market veterans.

Below is a brief look at Micro BTC contract specs:[7]

  • Symbol: MBT
  • Market: CME Globex
  • Size: 0.10 Bitcoin
  • Denomination: U.S. dollars and cents (USD) per Bitcoin
  • Minimum Tick: US$5.00 per Bitcoin
  • Tick Value: US$0.50 per tick
  • Listing: Monthly for six consecutive months and two added December months. If the initial six consecutive months include a December, then only one added December contract month.
  • Settlement: Financial
  • Trading Hours: Real-time trade conducted Sunday through Friday, 6:00 PM EST through 5:00 PM EST. One daily 60-minute break from 5:00 PM EST to 6:00 PM EST.

Since its launch, the MBT contract has grown exponentially in popularity. The contract's vastly reduced size dictates much smaller required margins, typically in the neighborhood of US$2,250 per lot.[8]. Subsequently, the MBT trading volume on the CME futures exchange exceeded the 1 million lot mark on 25 June 2021.[9] The success of the CME MBT contract led to the development and introduction of CME Micro Ethereum futures.

Why Trade CME Bitcoin (BTC) And Micro Bitcoin (MBT) Futures?

CME Bitcoin and Micro Bitcoin futures furnish active traders with an array of unique advantages.

1. Direct Exposure

Pricing of BTC and MBT futures products are both based on the CME Bitcoin Reference Rate. As the price of Bitcoin moves up and down, the BTC and MBT contracts reflect the fluctuations. As a result, the trader may secure direct exposure to the long and short side of the market. Conversely, buyers of a Bitcoin ETF or cryptocurrency subsidiaries listed on the NYSE are limited to long-side, indirect market exposure.

2. Exchange-Traded

Futures contracts are exchange-traded, meaning that they are highly-regulated. CME BTC derivatives are all subject to regulatory oversight from the U.S. Commodity Futures Trading Commission (CFTC). Also, there is no counterparty risk as the exchange guarantees the clearing of all transactions. This provides an added layer of security over OTC and cash market crypto products.

3. Volatility

In the world of contemporary finance, Bitcoin has a reputation for being among the most volatile assets. BTC's finite supply of 21 million, regulatory ambiguity and global participation make it subject to swift, dramatic swings in value. In fact, prices have fallen as much as 30% in a single 24-hour period.[10] While the enhanced volatility may not be suitable for some, it is ideal for many trend-following and reversal trading strategies.

Always-Changing Dynamic

While those are three of the biggest upsides of trading BTC on the futures market, the cryptocurrency dynamic is always changing. One example of this phenomenon was the October 2021 Securities and Exchange Commission (SEC) approval of the first Bitcoin ETF.[11]

Known as the ProShares Bitcoin Strategy ETF (BITO), the exchange-traded fund is based on positions held in CME BTC futures contracts. Analysts touted the Proshares BTC ETF as being another sign of mainstream cryptocurrency adoption while projecting immense public interest and liquidity.[12]

Getting Started With BTC Futures

As with all financial products, to access the BTC futures market there are a number of prerequisites that must be met. Among the most important are connectivity, a futures brokerage service and adequate risk capital.

1. Connectivity

If you're going to be an online futures trader, then it's imperative that you have a robust connection to the market. To accomplish this task, there's two vital inputs: computing power and internet access. Over the years, advancements in technology have created an array of alternatives in these areas.

In the modern marketplace, computing power comes in a variety of forms. Traders are free to use desktop PCs, laptops and assorted mobile devices. However, it's important that your computer meets basic requirements in terms of processor speed and RAM. These elements are critical to transferring and processing pricing data in real-time.

Also, your internet connection is a key component of your ability to access the market. Strong, consistent connectivity is required to trade futures remotely. To ensure your connection is up to the task, be sure to execute regular ping tests with brokerage and futures exchange servers.

2. Futures Brokerage Service

To engage BTC derivatives on a futures exchange, you need the services of a futures brokerage service. A futures broker furnishes traders with market access, software platform options and the margin money required to buy and sell cryptocurrency futures contracts.

The best futures brokers are reputable, CFTC certified and in good legal standing. There are dozens of choices available online, so some due diligence is required to find your ideal futures brokerage firm.

3. Risk Capital

The decision of whether to trade full-sized or Micro BTC futures will play a big part in how much risk capital you need to participate. Standardised Bitcoin futures contracts carry distinct margin requirements, a standard not applicable in a cash market or cryptocurrency exchange.

Realistically, the trade of full-sized CME Bitcoin futures is limited to institutional and high net worth individuals. Due to the size and volatility of the BTC contract, maintenance margins upwards of US$100,000 per lot are required.[13] Also, each tick is worth US$25.00, a significant application of leverage.

For retail participants, CME Micro BTC futures are more receptive. With vastly reduced margins (approximately US$2,100 per lot)[8] and tick value (US$0.50), the Micro BTC contract is designed with the average retail trader in mind.

Summary

The CME Group furnishes active traders with two options for trading Bitcoin futures: the full-sized BTC and Micro BTC contracts. Each is based on the evolving price of BTC (Bitcoin Reference Rate), offering market participants direct exposure to the world's leading crypto asset.

Bitcoin futures participants benefit from the security of the CME futures exchange and volatility of BTC pricing. All that is needed to engage these exciting markets is computing power, a brokerage service and adequate risk capital.

Please refer to our Product Guides to see full product parameters.

Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

Cryptocurrency products are only available to Professional and Eligible Counterparty Clients.

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References

1

Retrieved 09 Dec 2021 https://markets.businessinsider.com/currencies/news/bitcoin-trillion-market-cap-milestone-faster-amazon-apple-microsoft-google-2021-4-1030302376

2

Retrieved 09 Dec 2021 https://www.cnbc.com/2017/12/17/worlds-largest-futures-exchange-set-to-launch-bitcoin-futures-sunday-night.html

3

Retrieved 09 Dec 2021 https://www.cnbc.com/2019/03/18/cboe-to-stop-listing-bitcoin-futures-as-interest-in-crypto-trading-cools.html

4

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.contractSpecs.html

5

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.html

6

Retrieved 09 Dec 2021 https://www.fia.org/marketvoice/articles/micro-bitcoin-futures-success-hints-rise-retail

7

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/micro-bitcoin.contractSpecs.html

8

Retrieved 09 Dec 2021 https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/micro-bitcoin.margins.html

9

Retrieved 09 Dec 2021 https://www.prnewswire.com/news-releases/micro-bitcoin-futures-surpass-1-million-contracts-traded-301320335.html

10

Retrieved 09 Dec 2021 https://www.cnbc.com/2021/05/19/why-is-bitcoin-so-volatile.html

11

Retrieved 09 Dec 2021 https://www.etfstream.com/features/sec-is-wrong-to-only-green-light-bitcoin-futures-etfs/

12

Retrieved 09 Dec 2021 https://www.cnbc.com/2021/10/19/first-bitcoin-futures-etf-rises-2percent-in-trading-debut.html

13

Retrieved 02 Jul 2022 https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.margins.html

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