About fifty million Americans own Bitcoin from a fraction of a token to millions of dollars in total value. There are good reasons to buy Bitcoin for the long haul including the fact that there will never be more than twenty-one million and more than twenty million are in circulation now. Thus, the argument goes, Bitcoin will be safe from the steady devaluation that national currencies are prone to due to governments printing more and more money to deal with national debts. However, Bitcoin is also prone to wide price fluctuations. Thus, many try to time the Bitcoin market, attempting to buy low and sell high. This works for some and ends up being a disaster for others. A potentially profitable approach is to trade Bitcoin futures. This approach can be hugely profitable for those who are able to anticipate price swings but requires that one learn about futures and how to trade them.
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What Are Futures?
Futures are financial contracts. They are commonly used for stocks and commodities like coffee, oil and gold. They have also become a popular way to trade Bitcoin. A futures contract obligates the buyer to purchase or the seller of the contract to sell a precise quantity of the underlying asset at a price set by the futures contract on a date also set by the contract. Futures are used by those who produce purchase commodities like gold, oil, or coffee in order to hedge the risk of unexpected price fluctuations. Others buy and sell futures as speculators hoping to profit from swings in the price of the underlying asset. In the case of Bitcoin the primary reason for trading futures is speculation.
Where to Trade Bitcoin Futures
The CME group centered in Chicago is the world’s largest exchange for trading futures and options on stocks and commodities. You can also trade Bitcoin futures with the CME group. However, many crypto trading platforms like Binance also offer Bitcoin futures trading. In order to trade futures of Bitcoin on a platform like Binance you will need to create an account with them which will include a registration process and putting money in your account. Then you will select a trading pair such as Bitcoin and the US dollar. You will use the platform to set up a position which means deciding whether to buy or sell and how much. If you choose to use leverage you will decide just how much. Smart futures traders use techniques like stop loss orders to limit potential losses and take profits.
Profit Potential and Risk in Trading Bitcoin Futures
There are two keys to successful futures trading. The first is to correctly anticipate which direction the price of the underlying asset like coffee, oil, or bitcoin is likely to go. With stocks and commodities traders pay attention to supply and demand issues. With an asset like Bitcoin traders look for technical analysis cues like moving averages, letting the market itself indicate where prices will go next. The other key to success in futures trading is to competently manage risk. The fact is that when you buy or sell with a futures contract you are not obliged to hold that position until contract expiration. Traders follow their trades and when the value of their contract goes up due to an underlying price asset price change they exit their contract by purchasing to offset a sale or selling to offset a purchase. The point is to make money on a short term price fluctuation. Smart traders, when they set up a futures trade, immediately place a “stop loss” order at a price that will lock in a profit and one that will limit any loss. Thus, the trader is protected from rapid and unexpected Bitcoin price fluctuations. To the degree that a trader uses leverage this will increase their profit potential but also magnify any possible loss making stop loss orders even more important.
Practice Bitcoin Futures Trading Until Perfect
If you are going to actively trade Bitcoin futures, you will be working on a trading platform. You should use a platform that offers the option to practice trades using market data. This is called simulation trading. Good advice is that you should never risk any of you own money until you can routinely profit from your Bitcoin futures trades in simulation trading!
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