March 28, 2024

Bitcoin futures – what is it, what is it for, where to trade?

Bitcoin futures - what is it, what is it for, where to trade?

A Bitcoin futures is a contract to buy or sell an asset in the future at a specific price.After the conclusion of the contract, the parties are obliged to fulfill its conditions regardless of the market price at the date of expiration of the futures.

When dealing with futures, you can open longand short positions. In the first case, the trader agrees to buy the asset at a certain price in the future, in the second - to sell the underlying asset on the day the contract expires.

What are futures for?

These derivative financial instruments(derivatives) are mainly used to generate speculative profits. With futures, a trader can open both long and short positions using the leverage effect. The latter implies a high profitability of trades, as well as an increased risk.

However, futures were originally conceived asan instrument for hedging price risks. Thus, through futures, you can also reduce the risks of adverse price fluctuations for various assets.

For example, the main risk for Bitcoin miners isa drop in the price of a cryptocurrency to a level at which its mining becomes unprofitable, that is, the cost of electricity exceeds the income from the mined coins.

To secure their business, a miner cansell futures on the number of available bitcoins. If the cryptocurrency rate decreases significantly, then futures will make it possible to neutralize losses from a decrease in the price of an asset by profit from a short transaction.

Where can you trade bitcoin futures?

In addition to the CME and CBOE, which are heavily regulated by American laws, Bitcoin futures are also listed on the largest cryptocurrency exchange Binance.

Binance Futures features muchless stringent KYC procedures and AML policy requirements. In addition, such platforms have a much lower entry threshold, which means that they are available not only for large investors.

You can also trade with high leverage on the Binance Futures exchange.

How do I start trading futures on Binance Futures?

To trade bitcoin futures on the largestthe Binance world exchange, you will need to create an account on this site - the registration process on this exchange is quite simple and should not be difficult. Trading on Binance Futures is possible without verifying your main Binance account.

Link to register on the official Binance Futures website with an activated 10% discount on all trading fees https://www.binance.com/.

The top navigation menu has a "Futures" button. Click on it and select the "Futures" option.

Bitcoin futures - what is it, what is it for, where to trade?

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At the bottom right, under the order book, there is a separatemenu with the "Open Account" button. By clicking on this button you confirm the creation of a futures account. After that, you will see a menu of orders for opening long and short positions. To start trading futures, you need to transfer USDT to your futures account.

This is pretty simple. To do this, you need to name the button "Translation". A new window will ask you how much USDT you want to transfer. Just enter the amount and click the "Confirm Transfer" button. Transfer occurs automatically and without commission; To change the direction of the transfer, you just need to click the corresponding button between the wallets.

Bitcoin futures - what is it, what is it for, where to trade?

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What are the types of futures?

There are futuresdeliveryAndcalculated... The former assume that on the date of expiration (expiration) of the contract, the buyer must buy and the seller must sell the underlying asset in the amount specified in the specification to it.

An example of deliverable futures isbring forward contracts for oil or wheat. However, even here, in the overwhelming majority of cases, transactions are carried out without actual delivery of the underlying asset, that is, they are purely speculative.

Also, deliverable futures transactions are oftenare hedging, in other words, aimed at minimizing price risks. Therefore, most deliverable futures close before the expiration date.

Settlement futures do not initially involvedelivery of the underlying asset, but only a monetary settlement in the amount of the difference between the contract price and the value of the asset at the date of execution. Such instruments are also mainly used for speculative purposes and to hedge price risks.

What is special about bitcoin futures?

Futures contracts can be in the mostvarious assets - securities, stock indices, commodities and cryptocurrencies. In general, bitcoin futures are not much different from other futures contracts, they also allow you to bet on the price increase or decrease in the future.

Note that you can trade futures contractson BTC, without owning the cryptocurrency itself, but only speculating on its price. This is exactly how transactions take place on such well-known exchanges as CME and CBOE, which are aimed mainly at large investors.

However, the upcoming trading platform Bakkt will feature futures that involve delivery of physical Bitcoin upon contract expiration.

What is a futures specification?

This is an exchange-approved document that sets out all the terms of a futures contract, including:

  • name of the contract;
  • its abbreviated name or ticker (for example, XBT on the CBOE exchange or BTC on the CME);
    description;
  • the size of the contract (for example, for CBOE it is 1 BTC, for CME - 5 BTC);
  • type (delivered or calculated);
  • the minimum price step (for example, on CBOE it is five points, which corresponds to $ 5 in the USD / XBT pair);
  • delivery date and terms of circulation of the contract, etc.

What is futures expiration?

This is the termination of the circulation of the contract on the exchange. On the day of expiration, the obligations under the futures are fulfilled - mutual settlements are made between the parties to the transaction by paying the difference in prices (variation margin), or the underlying asset is delivered.

The expiration date is written in the specification for the futures.

What is Initial, Maintenance and Variation Margin?

Depositorinitial margin— refundable guarantee fee chargedexchange when opening a futures position. In other words, this is the amount required to open a position. Typically 2-10% of the current market value of the underlying asset.

However, in the case of bitcoin futures, due tofrequent periods of high volatility, the size of the initial margin is much higher in comparison with traditional financial instruments. So, on CME and CBOE it exceeds 40%.

The initial margin is charged to sellers and buyers and is designed to protect the broker from the risk of default on the trade.

Maintenance marginis the amount required in the account for the positionremained open to avoid triggering a margin call (forced closure of a position by a broker, which entails recording the trader’s loss and a sharp decrease in his balance).

Access to the CME and CBOE platforms is provided bybrokers (for example, TD Ameritrade and Interactive Brokers). These companies can set their own margin requirements, which may be higher than those of the exchange. For example, the American broker E-Trade has set margin requirements for Bitcoin futures at 80%.

There is also a termvariation margin... It is the amount of money that represents the profit or loss from open or closed contracts. The final value of the variation margin is calculated based on the results of the trading session.

What are contango and backwardation?

Until the expiration date, the prices of the contract and the underlying asset are usually different. As the futures settlement date approaches, the price difference decreases.

Suppose that before execution the futures price is higher than the value of the underlying asset. This situation is calledcontango(English)Contango, which literally means “price premium”). In this case, market participants are confident that the price of the asset will rise in the future. Contango can occur, for example, before the block reward halving, on the eve of the possible approval of a Bitcoin ETF or the launch of the Bakkt platform.

If the futures price is lower than the market value of the asset, this isbackwardation(from the English Backwardation - “delay”). This means that bearish sentiment prevails in the market.

How can futures affect the bitcoin rate and the crypto industry in general?

Many experts are sure that the appearanceBitcoin futures in the traditional market is driving the massive adoption and popularization of cryptocurrencies as mainstream investors become less skeptical about cryptocurrencies. This, in turn, can stimulate demand and have a positive effect on price and market capitalization in the long term.

The emergence of traditional financial instruments onbased on bitcoin actually means its recognition by regulators as an investment. The fact that bitcoin futures are gaining popularity in the highly regulated and largest American market in the world can serve as an example for financial institutions from other countries. Among other things, in jurisdictions where trading in cryptocurrencies is prohibited, futures allow speculation on the price of the underlying digital assets.

On the other hand, large market participantsit became possible to open short positions, a large volume of which could put pressure on the price of Bitcoin. However, the top manager of the Chicago Mercantile Exchange (CME), Tim McCourt, believes that futures do not affect the price of Bitcoin, since futures contracts for BTC so far represent only a small part of the market. The famous trader Peter Brandt agrees with him, who is convinced that one should not underestimate the influence on the market from a huge number of small Bitcoin investors.

At the same time, deliverable futures on Bakkt mayserve as an additional factor in the demand for Bitcoin. In addition, as this market develops, the likelihood increases that the SEC will finally approve exchange-traded funds (ETFs) linked to Bitcoin futures.

There is also an opinion that Bitcoin futures help reduce its price volatility.

Be that as it may, the integration of the cryptocurrency market with the traditional one can potentially contribute to the massive adoption of new assets, and hence their long-term growth.

How can you predict the price of BTC based on the futures report?

A futures contract can be entered into for anything.— for goods, securities, currency, including cryptocurrency. They can also be resold to others. At the moment, the crypto market is predominantly content with Bitcoin futures, although it cannot be ruled out that in the future we may also see Ethereum futures. So far, regulators have not approved ether contracts.

At the same time, Bitcoin futures are already confidentlytraded on the CBOE and CME exchanges. True, these instruments do not imply a real purchase of bitcoin with them, all payments for them are made in fiat. That is, you either win or lose on the difference in exchange rates without receiving real bitcoins to your wallet. And when you buy a futures contract from someone who signed it earlier, you are not buying Bitcoin, but only a contract for it.

Why do we need to watch futures?

Now that we know the logic behindthe conclusion of futures contracts, it becomes clear why it is important to follow them. Obviously, if a large number of large players open short at the same time, it means that you should think about a possible imminent drawdown in the market. Conversely, a reversal can be expected when whales begin to swim long.

Also, according to the volume in which futures are sold or bought, it is possible to assess the level of interest in Bitcoin itself, which may affect the market price of the asset.

Where to look?

Futures reports are regularly published by the Commission onfutures trading (CFTC), one of the main US financial regulators. That is why, by the way, traders are now left without this instrument - as a result of the so-called "shutdown" the work of the American government is blocked.

Until the government comes for certainissues to an agreement with President Donald Trump, regulators will not be able to continue working, which means we will not see reports. It's time for those who have not yet analyzed them, gain knowledge and come up to the new report fully armed!

The Commission's reports can be found on the official websitedepartments. They usually go out on Friday around 3:30 pm ET. On holidays, reports are postponed. In the tab on the link above, we scroll down the page to the list of sites. We need reports in Long format from CME and CBOE.

Bitcoin futures - what is it, what is it for, where to trade?

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By clicking on the required format, we will receive a whole listreports, among which we need specifically bitcoin (to save time, we are looking for it through a search on the page - Ctrl + F). This is what the latest report from December 18 looks like:

Bitcoin futures - what is it, what is it for, where to trade?

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It looks intimidating, but in reality, the meaning of each column is quite simple. Let's go through their list:

Open Interest— total number of open contracts, each contract — 5 BTC. After it there are positions for which there is data that fits the regulations of the Commission’s report.

Non-Commercial- these are the positions of major players who do notfill out Form CFTC-40. As a rule, speculators and hedge funds end up here. Let's look at the contents of the section. If we have already become acquainted with the concept of longs and shorts above, thenSpreading- This is something new. This column records overlapping positions among the same market participants.

For example, one and the same speculator has100 long positions and 50 short positions. In this case, the difference in the number of positions will be entered in the required column (50 contracts in this case are considered long). At the same time, another 50 long and short contracts will be included in the report as 50 spreading contracts. A trader usually opens both short and long positions at the same time if he wants to insure himself against possible losses.

Commercialare official large institutional players that are required to file Form CFTC-40.

Total(Total Sum) sums all positions taking into account spread.

Nonreportable positions- these are small market players, the data for which does not fall under the Commission’s standard reporting format. It is ironic that in the vast majority of cases they are deceived in their expectations of the market.

Changes in commitmentsis the difference in the number of different positions incompared to last week. In the above report, for example, we see that institutions closed four longs and a short this week. If spreading increases at the same time, it means that contract holders are not very confident in their position and want to hedge their bets.

Percent of Open Interest— shows the ratio of longs and shorts as a percentage, calculated taking into account spreading.

Below is the number of traders in each category, Spreading includes those players who have both longs and shorts open.

The last lines of the report tell us aboutwhat percentage of contracts in a particular category are concentrated in the hands of four or fewer traders and eight or fewer traders. This allows us to assess how “fat” the whales are in the market and how many contracts they have seized.

How to analyze this data?

Of course, the most interesting thing is the change in the numberopen and closed positions from week to week. Already from these movements, a lot can be assumed by where the market will go, and whether there will be any significant movement in the near future.

It is also very interesting to watch the momentswhen a large number of positions of any orientation are collected in one hand. This may indicate that a large fish knows something about upcoming events in its pond and reacts in advance. Institutionals are especially famous for such insiders.

Different dynamics of the numbers can hint at very different scenarios, so we evaluate the data as a whole, we try to look at the whole picture.

Bitcoin futures - what is it, what is it for, where to trade?

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