What Are Bitcoin Futures?

A future is a derivative contract. Participants are obliged to buy or sell the asset specified in the contact as of a set future date. Buyers must buy and sellers must sell no matter where the underlying price has settled. Buyers of futures have expected the price of the underlying asset to rise and sellers have expected that price to fall. A common practice among futures traders is to exit the trade, hopefully with a profit, before the expiration date. The cost of a futures contract is substantially less than the cost of the commodity, stock, or cryptocurrency covered by the contract.

The Commodity Futures Trading Commission or CTFC considers Bitcoin to be a commodity, and since the CTFC oversees the futures market they categorize Bitcoin futures as commodity futures just like corn, soybeans, and gold. Trading of Bitcoin futures takes place on the CME, the Chicago Mercantile Exchange, as six-month quarterly contracts settled in cash. Bitcoin futures contracts cover 5 BTC and expire on the last Friday of the month.

What Are Options on Futures?

When one buys or sells a futures contract, they are obliged to buy or sell, or settle with cash as in the case of Bitcoin, unless they exit the contract prior to expiration. A way to add flexibility to this situation is to buy or sell options on Bitcoin futures. An option contract gives the buyer the right to exercise a futures contract which the buyer will do, providing that doing so is profitable. Options come in two flavors, calls and puts. Buying a call gives the buyer the right to purchase the underlying, in this case a futures contract, at a price set by the contract and selling a call obligates the seller to sell the contract. The buyer pays a premium for this right. The other flavor is the put which gives the buyer the right to sell the underlying at the contract price, called the strike price, which they will do if profitable. The seller is paid a premium and the buyer pays a premium.

Why Trade Bitcoin Futures Options?

Trading options on Bitcoin futures has a couple of advantages over simply buying or selling Bitcoin. The capital invested in a futures contract or an options contract on Bitcoin futures is significantly less than the cost of buying 5 BTC. But the potential profit is similar when BTC price moves as expected. Then there is the issue of losses when Bitcoin falls in value. Anyone who purchased 5 Bitcoin for $67,000 each or $335,000 in November of 2021 has lost $47,000 or $235,000 over the last year. In comparison, the maximum loss when purchasing an option contract, call or put, is the premium paid for the contract. If a trader believed that Bitcoin was going to rally and purchased call options on several Bitcoin futures contracts, the worst they would do if Bitcoin fell is lose the premiums paid for the options contracts. The best that they could do if Bitcoin rallied would be to experience profits similar to if they had just bought futures contracts or purchased Bitcoin directly. Thus, one can limit risk with options on Bitcoin futures while at the same time leveraging trading capital.

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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.

Why Trade Bitcoin Futures – Slideshare Version

Why Trade Bitcoin Futures? – DOC

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