Bitcoin and other cryptocurrencies have helped both create and take away fortunes. We all wish that we had bought bitcoin back when a bitcoin was a dollar, or ten dollars, or a hundred or even a thousand dollars. On the other hand, those of us who did not buy back in November of 2021 when it was $67,000 only to be holding that investment today when bitcoin is worth about $35,000 ought to be pleased. Why trade bitcoin futures? The point is that there tends to be more profit potential from the up and down fluctuations of bitcoin than its climb from a dollar to the $35,000-$67,000 range.
What Are Bitcoin Futures?
Bitcoin futures are futures contracts that trade on the CME (Chicago Mercantile Exchange), the same way people trade futures on commodities like gold, coffee, live cattle or stock indexes. Unlike when you buy bitcoin when you trade bitcoin futures you do not hand over bitcoins when you sell futures or accept bitcoin when you buy futures. Bitcoin futures contracts are settled for cash every month. Since December of 2017 the CME has offered bitcoin futures contracts, Micro bitcoin futures which are one tenth the size of the standard contract, and options on bitcoin futures.
Calculating Bitcoin Futures Contract Profit and Loss
Futures markets have different ways for calculating price movement and contract size. A CME bitcoin futures contract is five bitcoins and contract prices are quoted as dollars per bitcoin. Ticks are $5 per bitcoin or $25 per contract. And, there are reduced ticks at $1 per bitcoin and $5 per contract. The value of the contract is the price of bitcoin multiplied by the five bitcoins represented in the contract. The price of the Micro bitcoin is a tenth of that. A one tick move is $25 by the number of contracts. As the price of bitcoin moves up or down so does the value of the contract. Traders do not need to hold their contract until expiration but can buy or sell to exit the trade in order to ensure profit or limit loss.
Options on Bitcoin Futures
Because bitcoin can fluctuate rapidly, trading futures, like buying and selling bitcoin directly can be risky. A way to limit this risk is to hedge it using options. A simple example would be to buy a call on a futures contract to buy bitcoin. The risk is the premium paid for the call contract. The reward can be substantial for an out of the money call that pays off should bitcoin go from $35,000 to $100,000 as some who promote bitcoin are saying. A similar approach if one believes bitcoin will fall more is to buy a put on a futures contract to buy or a call on a futures contract to sell. By applying more complicated options strategies like a bear or bull call spread a trader can go into an options trade on a bitcoin futures with an affordable amount of money and know from the start just how much the trade could make and how much it might cost.
So, why trade bitcoin futures? It is a way to potentially profit from bitcoin price movement without buying or selling bitcoins themselves. And, it is a way to hedge risk when you do own bitcoin.