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Bitcoin Futures Trading: An In-Depth Guide for Beginners

Within the last couple of weeks, Bitcoin has had a couple of major developments which have helped to boost the price up to the $60,000 mark. These developments happened in Chicago, Illinois, starting with the Chicago board options exchange (Cboe) and the 1st ever Bitcoin futures contract. This happened on December 10th. A week later the world’s largest futures exchange, the Chicago Metropolitan Exchange (CME), also launched a Bitcoin futures trading market. This is huge news for Bitcoin because it has allowed Bitcoin to enter the mainstream financial markets which lend legitimacy to the cryptocurrency. The price of Bitcoin gained with a 19% surge on the Cboe during the 1st day of trading. As expected, the price of Bitcoin on all of the markets also enjoyed significant gains, and at one point, although briefly, Bitcoin surpassed the $69,000 mark.

CME Group
CME Group

Bitcoin Futures Trading Guide

Here are the main highlights of Bitcoin Futures Trading. Each will be gone over in detail later in the guide.  Bitcoin Futures Trading contracts were offered for the very first time on 2 futures trading exchanges.

  1. Bitcoin has gained legitimacy as a currency due to its inclusion on these exchanges.
  2. The price of Bitcoin has seen significant gains due to the mainstream options now available.
  3. Bitcoin Futures Trading contracts will allow speculators to gamble on what the price of Bitcoin will be at a specified date in the future, at which point they will be obligated to settle the transaction regardless of the current price of Bitcoin at the expiration of the contract.
  4. Currency futures trading has been in existence since 1972 and is a highly regulated form of day trading. The regulation also lends credibility to Bitcoin where no credit has existed until this point.
  5. As a result of its inclusion into the mainstream financial markets, Bitcoin can expect to see significant gains continue and an overall rise in price and possible stability as more people enter the sphere.
  6. In order to participate in Bitcoin Futures Trading, both buyers and sellers must obtain the services of a broker.
  7. The Chicago Metropolitan Exchange is the largest currency futures exchange in the world and the 2nd behind the Chicago board options exchange, to offer Bitcoin Futures Trading contracts.
  8. Bitcoin Futures Trading provides traders with a way of entering into the foreign exchange market under greater regulation and scrutiny and full transparency.
  9. Bitcoin Futures Trading contracts are standardized, regulated, and free of counterparty risk. The clearinghouse is used by the exchanges guarantees that all traders in the futures market will honor their obligations.

Understanding what Bitcoin Futures Trading is, how it will affect Bitcoin now and in the future, and how you can take part and benefit the most from the recent mainstream acceptance of our beloved cryptocurrency is the purpose of this guide. It is important to note, that the recent Bitcoin Futures Trading on mainstream financial markets is also responsible for the uptick in other cryptocurrency values. This is the time that, were we speaking of animals, that the survival of the fittest rules would apply. With Bitcoin being a front runner and financial news, is making those who have been skeptical, those who had not known, and those who have been dragging their feet and sitting on the fence take a better look at both Bitcoin and by proxy, all other cryptocurrencies. This is apparent if you look at the recent prices of Ethereum, Litecoin, and DASH as well as a few other altcoins.

Read also: 7 business ideas you can generate with Bitcoin

Whether or not cryptocurrencies are going to be taken seriously is no longer the question. The question is now, which cryptocurrencies are going to survive and become part of a global economy.

What Are Futures?

In the financial world of stocks and Forex trading, besides trading the actual assets back and forth, trying to profit from the sale, there are also exchanges that feature something called futures contracts. If you just contract is simply an agreement between 2 people; a buyer and a seller. The seller has an asset that he wishes to secure the value of. The buyer wishes to get an asset at a specific price.

This sounds pretty straightforward and describes any kind of business transaction. However, in futures trading, the agreed-upon sell price of the asset is set now for a date in the future. When that day comes, per the contract agreement, the seller will sell the asset to the buyer and the buyer will pay for that asset at the price that was originally set, no matter what the actual value is at the time of the sale.

How are Bitcoin futures priced?
How are Bitcoin futures priced?

Use Case Scenario of a Futures Contract

To use an example, we will use the world’s largest and most widely traded commodity futures contract, which is crude oil. In crude oil futures trading, a contract has a unit of 1000 barrels. This is important because if you enter into a contract for 25 crude oil futures, then you are actually purchasing 25,000 barrels.

Step 1: Have Something to Sell

In our example, let us assume that Shell Oil would like to create a futures contract to sell 25,000 barrels of oil. Let us assume that oil is $50 per barrel today. The price of oil goes up and down just like a roller coaster does and Shell would benefit if they can get that same $50 in 3 months. So, they offer a contract set to expire 3 months from today for 25,000 barrels at $50 a barrel.

Step 2: Have Someone Interested to Buy

Let us assume that the Greyhound bus company would like to ensure that they do not pay any more than $50 a barrel, which they use for their gasoline. They would enter the contract with Shell and agreed to purchase 25,000 barrels at $50 a barrel, 3 months from today.

Step 3: Enter into a Futures Contract

It doesn’t matter what the price of a barrel of oil is in 3 months. It could’ve plummeted to $20 a barrel or skyrocketed to $200 a barrel. On the agreed-upon date, Greyhound will acquire 25,000 barrels and $50 a barrel. This is great for Greyhound as they would have saved $150 per barrel. And while you may think that this is bad for Shell, actually it isn’t. Shell is very happy to have sold 25,000 barrels of oil at the secured price. This is called hedging.

Basically, all Shell and Greyhound are doing is taking an offsetting position in the price of oil in order to balance any gains and losses. Hedging does nothing more than attempt to eliminate the volatility of an asset.

On the other hand, there are also those who seek to profit from bedding in the direction in which an asset will be moving at the contract due date. This involves speculating what is going to happen with that specific asset in the near future. This is where the term, speculation, and speculators in the financial world come from. Essentially both the buyer and the seller are speculating what the price will be in the future.

Why Do Futures Exist?

Futures contracts were originally implemented as a way for farmers to hedge against the ever-changing prices of their crops between the time that they planted them in the time that they harvested them and brought them to market. This allowed the farmers to ensure that the money spent on planting the crops would be returned and no losses taken come harvest time, should the prices of their crops have fallen.

Most farmers would only offer a certain portion of their crop, enough to cover their overhead, in futures contracts. Then allowing the rest to be sold at current market value, obviously hoping for a gain. However, if the price of the crop did fall, at least their overhead would be covered, and they would be able to plant again next year and avoid bankruptcy.

Futures trading has expanded beyond agricultural commodities and now includes assets such as precious metals, industrial metals, energy, bonds, and stocks. All futures contracts are standardized in the sense that the units are predefined the length of time as well as the general contract terms and conditions.

Record open interest in Bitcoin Futures
Record open interest in Bitcoin Futures

What Is Bitcoin Futures Trading?

When you’re talking about currencies, also called Forex, futures contracts are set to buy or sell a specific amount of the particular currency at a set price at a date in the near future. There like other futures contracts in that they are traded in terms of how many months the contract is for using a standard maturity date. Bitcoin future trading is no different. It trades both on the Cboe and CME, which are both the Forex futures trading exchanges. As stated above this legitimizes Bitcoin as a currency.

With the addition of Bitcoin Futures Trading contracts, investors who had no prior holdings or interest in Bitcoin, can now take positions on dates in the future and enter into contracts for Bitcoin. Typically, the standard maturity dates will fall on the 3rd Wednesdays of March, June, September, and December. As with all other futures markets, the Bitcoin Futures Trading market is an extremely liquid market. It is very risky and complex by nature and only by understanding how it functions can’t be fully understood.

Bitcoin Futures Trading: Professional Financial Gambling

With Bitcoin Futures Trading, it is merely a game of profit and loss. You will have the sellers who think that Bitcoin’s price is going to fall, and you have the buyers who believe it is going to rise. The seller will offer up a Bitcoin futures contract at today’s price with the hopes that on the date of the sale, Bitcoin will be valued less. While on the other hand, the buyer hopes to enter into the Bitcoin futures contract at today’s price with the hopes that the value will be greater upon the execution of the sale. This is called taking a short or a long position.

Every contract on a futures exchange must list very detailed specifications which include the size of the contract, the minimum price increase in the corresponding market value. With these, traders interested can determine position sizing and the account requirements, as well as how much they may gain or lose for the different price movements in the contract.

Futures Contract Trading Example

As an example, we will use the euro/US dollar contracts. The contract shows a minimum price increment of .0001, with a tick value of $12.50. What this tells us is that any time that there is a .001 movement and price in any direction, the value of the contract will change by $12.50 in the direction of the change. So, if you were to enter a long trade at 1.3958 and it moves to 1.3959, the price movement would be worth $12.50. Now, if you took the same long trade and it moved to 1.3968, the price move would now be worth $125. This is calculated by taking the value of the move, $12.50, and multiplying it times 10 ticks or pips, as they are often called.

Bitcoin Futures Trading Contract Settlement

There are 2 ways in which you can settle a Bitcoin Futures Trading contract. In most cases, whether it be a Bitcoin Futures Trading contract or regular Forex futures trading contract, both the buyer and the seller will offset the original position that they took before the last day of trading ends. They do this by taking an opposite position. When the opposite position closes the trade prior to the last day of trading, the loss or gains are then credited to or debited from the traders’ account.

The 2nd way, and less frequently chosen, contractors are held until they mature and in the contract, is settled as cash or delivered physically, depending on the contract and the exchange. Most currency futures, which now include Bitcoin Futures Trading, are subject to physical delivery at least 4 times a year. This being said, it is important to note that only a very small percentage of these contracts are ever settled with physical delivery. However, if this method of settlement is chosen the exchange and participants each have their own obligations that must be adhered to in order to complete the delivery.

Bitcoin futures chart back in 2019
Bitcoin futures chart back in 2019

Bitcoin Futures Trading: Regulation, Oversight, and Brokering

Another important aspect of Bitcoin Futures Trading is that there is no actual contract between buyer and seller directly. Instead of a direct contract, both the buyer and seller have a contract with a clearinghouse. This greatly reduces the risk for both the buyer and the seller, in the event that the other party would fail to meet their obligations and terms of the contract. The buyer would make an arrangement with the bank to pay the money into the International Money Market delivery account. That is the same account that the sellers would then be paid from.

Bitcoin Futures TradingBitcoin Futures Trading must follow regulations that are enforced by government agencies which include the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), as well as follow any rules set forth by any exchange where Bitcoin Futures Trading occur. Bitcoin Futures Trading will have a great deal more oversight than the oversight experienced on the spot Forex markets. This is another reason that that Bitcoin gains legitimacy due to the futures trading contracts now available to the general public.

Requirements of Bitcoin Futures Trading Account Holders

Bitcoin futures are exchange-traded futures. Those who wish to trade Bitcoin futures contracts will typically have to have an account with a broker who will direct orders to the various exchanges to buy and sell the Bitcoin Futures Trading contracts. In most situations, a margin account is generally used for currency futures. If this were not the case it would take a lot of cash to place a trade. By utilizing a margin account, traders can borrow money from the broker in order to place the trades, and as with all margin accounts, the available balance is usually some multiplier of the actual cash value of the account itself.

What do Bitcoin Futures Mean for The Bitcoin Price?

Bitcoin futures contracts will essentially help increase the value of Bitcoin today, tomorrow, and every other day for the foreseeable future. This is because it was going to create interest by a very wide range of people into Bitcoin and cryptocurrencies in general. Although Bitcoin has been around since 2009 and has been a lot more mainstream since 2014, there are still many who would never accept the fact that it would work. However, when the largest futures trading exchange in the entire world lists Bitcoin futures as an option, even the most skeptical critic cannot argue the validity and legitimacy that it lends to Bitcoin. In comparison to regular Forex accounts, a Bitcoin Futures Trading account will have a much more conservative leverage amount, have much more oversight and regulation, as well as full transparency and a risk-free environment to the counterparty since every contract is guaranteed by the clearinghouse.

The Price of Bitcoin Can Be Expected to Rise, Then Fall, and Then Rise Again

While Bitcoin may have its high and low points on a daily basis, some drops as much as 30% or more, the inclusion of Bitcoin on the Chicago exchanges as a tradable option for futures will ensure that the overall price of Bitcoin will continue to climb. While you may hear numbers in a wide range of values, when it comes to the price that Bitcoin will eventually reach, the sources that you should trust and listen to are the same sources that for predicting these types of things for the last 40 years; professional investors.

Of course, given all of the excitement and hype over the inclusion of Bitcoin onto the Chicago Mercantile Exchange and the Chicago Board options exchange, much of the most recent rise in the Bitcoin price is due to pure speculation. This creates a sort of bubble. Not a huge bubble-like bubble, but a smaller bubble that will most likely burst. If you look at it like a glass of cola, it may be easier to understand.

When you open a can of cola, (or a bottle), and begin pouring it into your glass, you will have a lot of phones built up to the top and will have to stop pouring to avoid spilling it. You then set the can or bottle down and wait a few seconds as all of the bubbles burst. Then you simply pick up the can or bottle again and continue to pour the billing the space it was just full of bubbles with more cola. Each time you pour more cola you create more bubbles at the top. These bubbles eventually burst, and the cola can be ported to fill in the space until the glass is full. Now imagine doing this with a glass that has an infinite amount of headspace. So, while the price of Bitcoin may fall due to, technically, a bursting bubble, no one should panic because the overall price of Bitcoin will continue to fill in the space above. It may be like a wild roller coaster ride but in the end, you’ll be glad that you got on.

Why Does Bitcoin Futures Trading Benefit the Whole Blockchain Industry?

Bitcoin Futures Trading is great for the entire world of cryptocurrencies, as well as the black chain technologies that allow the cryptocurrencies to exist. This is due to the influx of new people into the digital currencies realm. As more people take an interest in Bitcoin Futures Trading, they will undoubtedly do further research, thereby exposing them to even more cryptocurrencies in the process.

It also gives those who have been skeptical in regard to cryptocurrencies the needed push to finally jump in, or at least stick the toes in the water a little. In any case, the recent inclusion of Bitcoin into a mainstream financial market has drawn and will continue to draw brand-new people into the digital world of finance. And like every single one of us, who are already deeply involved in Bitcoin and other cryptocurrencies, these new people will also read, learn, discover, and then decide to try new cryptocurrencies out for themselves as they become comfortable.

CME News pump Bitcoin futures
CME News pump Bitcoin futures

How Can You Get Started in Bitcoin Futures Trading?

Bitcoin Futures Trading is actually not new. It is true that it is new to the mainstream financial markets, but several of the cryptocurrency exchanges have already been offering Bitcoin futures for quite some time. To begin trading on the cryptocurrency exchange, where it is much easier for an experienced trader to begin, albeit, a lot riskier as well,

  1. Choose an exchange that offers Bitcoin Futures Trading as an option and that you trust.
  2. Prepare for your Bitcoin Futures Trading by making sure that your account is set up to the requirements of the exchange and that you have funding and withdrawal options available and set.
  3. Understand the Bitcoin Futures Trading contracts and how you can best benefit from them.

If you would rather get involved with Bitcoin Futures Trading contracts on one of the mainstream exchanges such as the Chicago Board options exchange or the Chicago Metropolitan Exchange, then you need to follow these steps:

  1. You will need to find a broker that supports the exchange that you wish to conduct Bitcoin Futures Trading on. For the Chicago Metropolitan Exchange (CME), you can visit their website to view a list of all supported clearing firms HERE.
  2. You will then need to sign up for an account on the CME Direct web platform, which will allow you access to their one-stop trading in futures, options, and blocks. Click the following link to visit CME Direct.
  3. Ensure that your accounts with both your brokerage that you choose, as well as your exchange account have been fully verified, meet the requirements set forth by each entity, is funded, and that you have researched and/or ask all the questions you may need of your broker and then place your order for Bitcoin Futures Trading contracts.

That is really all there is to it. While it is obviously a bit more difficult than it sounds by reading the steps, it is really just an issue of time and how long it takes to get everything done set up, and ready for you to begin Bitcoin Futures Trading.

Bitcoin Futures Trading: Ask Questions

It doesn’t matter if you are a seasoned veteran in the world of finances and futures trading specifically or if you are brand-new to it all. Everyone is on an even playing field when it comes to Bitcoin Futures Trading. It is untested and unprecedented-with no use case scenarios to go by or any examples at all to pull from. In order to ensure you minimize your losses and maximize your gains, never stop asking questions about the resources you need to educate yourself on Bitcoin Futures Trading. History is being made on a daily basis and the worst thing you can do is assume you have it all figured out. It is important to remember an old saying that holds very true to this day:

“The only stupid question is the one that is not asked.”

  1. Utilize the services of your broker. Ask your broker questions, for advice, for everything you can to make sure you fully understand everything there is to know about Bitcoin Futures Trading on the market you choose to trade on.
  2. Utilize web resources. Websites such as Investepedia are a great resource and are full of information to help you learn everything there is to know in the world of finance in general.
  3. Attend any type of classes or seminars on futures trading. Whether it be a local class or seminar, or one that you find online, there will be plenty of free education available for you to learn everything you need to know to be as successful as possible in Bitcoin Futures Trading.

Once you think you have learned everything there is to learn, learn some more. The most successful investors in the world, whether it be in Bitcoin Futures Trading, the OTC market, Wall Street, or a Bitcoin exchange will all tell you the same thing: even after years of experience, they still learn something new almost every single day.

Bitcoin Futures Trading Summarization

Now that you should have a better understanding of exactly what futures are and how Bitcoin Futures Trading works specifically, the hope is that you have a better understanding of not only how it all works, but also the impact it will have on Bitcoin and the entire cryptocurrency world as a whole. While it is important to remember that there are no guarantees on what will happen to the price of Bitcoin or the future of cryptocurrency and that I, myself, and by no means any sort of financial guru, sometimes the facts are so clear, that it is hard not to just apply common sense and reason and draw a conclusion as to the success that all of these events must inherently bring.

Sure, Bitcoin is going to fall, bubbles are going to burst. I am not arguing that. In fact, I wholeheartedly agree with the critics who say that the Bitcoin bubble is going to burst. Because it will. The only difference between the professional financial critics and myself is the fact that I realize that once the bubbles burst it just creates more room for Bitcoin to grow. And grow and grow it will. Now is the time, if you haven’t already, to get into Bitcoin. Even if Bitcoin Futures Trading is not for you, there are plenty of other ways that you can get some Bitcoin to hold and watch as it grows into a nice financial instrument that will eventually provide you with security and financial stability.

Welcome to History Being Made. Welcome to Bitcoin

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