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Futures Trading

Growing interest amongst a large number of institutional investors for futures trading across multiple exchanges has led to the success of entities such as the Chicago Mercantile Exchange (CME) with specific regard to Bitcoin. Other examples include Bakkt and Bybit. In terms of analytics, CME Bitcoin futures reached an all-time high of ~$500 million in May 2020.

Futures trading refers to the creation of contracts between two parties (investors) that bet on the future price of a particular asset, in this case, cryptocurrencies. This gives investors an additional avenue for gaining exposure to certain assets without physically owning those assets and is typically used as a diversity tactic.

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Futures Contracts

The futures contract within this form of trading represents a legal agreement to purchase or sell a security (or commodity) at a specified date in the future for a designated price. These contracts are what are physically bought and sold on futures exchanges like CME. This contract occurs between the buyer (who is purchasing the obligation to receive the asset that the contract is based on, i.e., Bitcoin) and the seller (who is selling the asset at a specified price and future date).

An important point about contracts is that they function as derivatives of a certain asset. So, if investors wanted to trade Bitcoin futures contracts, the contract units would operate as derivatives just like for commodities or stocks in traditional financial markets. This concept is what allows for futures trading on regulated cryptocurrency exchanges.

Just like with stocks or commodities trading, users can open an account with licensed futures trading platforms like FTX or Binance. Going through a KYC process, those users gain access to futures liquidity and contracts trading on select assets. This also determines the limits of the user based on the platform’s own verification standards in terms of margin trading limits and funding requirements.

Futures also open the door within the crypto market for the creation of other derivatives as well, including options trading.

Why Are Crypto Futures Useful?

Crypto futures are used to reduce market risk exposure. For instance, bitcoin miners may sign a futures contract to protect their long-term objectives and business calculations from volatility. They simply make the price predictable by entering into a futures contract and continue mining with the knowledge that the price of their asset will remain consistent (in accordance with a contract signed).

In addition, futures contracts can serve as a hedge against loss for owners of digital assets. If a trader believes the price of Bitcoin will decline, the trader can then "bet" on his prediction (go short) and earn more Bitcoin if the prediction turns out to be correct. In other words, the trader purchased a futures contract in order to sell it once the price plummets. Thus, this allows experienced traders and institutional investors to profit from their own expertise by utilizing futures contracts rather than simply trading the spot market with hopes for positive market gains. The risk of a market decline is turned into a profitable opportunity.