What Beginners Need To Know When Looking To Start Trading Bitcoin Futures

Bitcoin, the face of the crypto market, has introduced a new asset class, which has forever changed how people think about money, value, and even trust. What started as a decentralized concept leveraging blockchain technology has morphed into a powerful force disrupting traditional finance. It has reshaped corporate strategies and opened a new era of permissionless investment that eliminates many burdens associated with traditional financial institutions, to name a few achievements. 

Now, Bitcoin futures have emerged as Bitcoin-based investment vehicles that allow interested individuals to bet against a future price and buy the asset when it reaches a specific value. Bitcoin futures have transformed how institutional and retail investors engage with the over $2TN worth of market. These serve as contracts that make for a new way to trade the world's leading crypto.

Bitcoin futures are tied to the Bitcoin crypto and permit owners to trade their view on the future prices of this volatile market. BTC futures are available on regulated exchanges, and investing in them allows for speculating on the asset’s performance without owning the asset per se. 

This article sheds light on how Bitcoin futures work, who trades them, why Bitcoin is a good fit for these contracts, and what you need in order to enter this market.

BTC futures in short 

Bitcoin futures represent contracts allowing users to purchase or sell BTC at a pre-established price in the future. They’re established in cash so that no BTC exchanges hands, and allow individuals to leverage Bitcoin exposure without managing the crypto via wallets and other means themselves. 

Before Bitcoin futures, one would have to use exchanges or margin trading on offshore apps to bet on future crypto price performances. Now, traders can speculate on prices in regulated, institutional-grade settings, which offers the market legitimacy.

Who trades these futures?

The BTC futures market mainly consists of two categories of traders:

• Concentrated traders who zero in on Bitcoin. They’re often retail or crypto-first players committed to monitoring Bitcoin’s every single move.

• Diversified traders, such as asset managers, who spread their capital across more asset categories besides Bitcoin, like commodities, stocks, or forex.

• Leveraged traders, including trading advisors and funds, usually own the most considerable positions and frequently hold more short positions than long ones. Essentially, they're often anticipating prices to drop, at least on balance.

The difference between leveraged, diversified, and concentrated traders must be kept in mind. Leveraged activity tends to influence the market the most, with the remaining traders following signs. Therefore, leveraged traders’ activity can offer the best insights into the broader institutional sentiment surrounding the crypto market leader, Bitcoin.

The strongest suits of Bitcoin

Newbies to Bitcoin futures may wonder why this asset is such a great fit for future price contracts. In short, Bitcoin provides a few unmatched advantages, such as the decentralized approach to finance that makes the crypto uncontrollable by any government or entity. This allows individuals to transfer BTC without needing involvement from any intermediaries, as is the case in traditional financial markets. 

Bitcoin can also support financial stability in places around the globe where banking systems and governments fail, such as El Salvador, Nigeria, Tanzania, and South Africa. Capped at 21MN coins, after which no Bitcoin can ever be created, the asset resembles precious metals in that it’s all limited in supply. Practically, this scarcity that’s maintained through regular token burns should help the crypto keep its value and fight devaluation in time. 

What you need to trade 

It’s essential to set yourself up with all the necessary tools and knowledge before starting to trade futures:

• You’ll need a futures trading account on a brokerage platform – your everyday cryptocurrency applications don’t cut it. And don’t forget about good internet. Futures are fast-paced, and lags can cost you money.

• Make the difference between leverage and margin. Margin is the money you risk, while leverage is the multiplier effect of that margin. Using leverage can potentially boost profits and losses, since you're controlling more than you actually own.

• Invest just the right amount of capital, preferably starting humbly if you lack experience and need to build knowledge.

• Create a trading plan that includes your risk limit, exit points, and entry points, and employ stop and limit orders.

The fundamentals of contracts 

Of note, you need to learn the contract basics.

• Each standard contract represents 5 BTC per contract -- big stakes and financial commitment that make this choice suitable for seasoned traders.

• Micro contracts are better for beginners since they’re more accessible and reduce risks. Each contract represents 0.1 BTC.

• The expiry date is the date when the contract settles and its value gets converted into cash, depending on BTC’s price. 

• Long trades are when you bet on BTC’s price going up, ending in a profit, should it do so. 

• Short trades imply you bet on BTC’s price to fall, and result in a profit only if BTC devalues.  

• When the contract expires, the difference between the price you paid and the price when the contract is settled determines your cash payout.

In short, you can bet long (price increases) or short (price decreases). Depending on BTC’s price at the expiration date, you can gain or lose.

Trading futures is nothing new 

Crypto traders may think such trades are much different from old-school commodity trades that involved gold, silver, crude oil, and even coffee. However, they’re using the same core financial tools, namely futures contracts, to speculate, trade, and generate yields. It’s only that these contracts are futures contracts based on cryptos like Bitcoin. 

Last note 

Like all futures, Bitcoin futures are derivative financial products, meaning that the underlying asset drives their worth. Notably, futures spread across more crypto asset categories, including Ethereum, Litecoin, and Bitcoin Cash. However, they’re all fast-paced and risky. Each exchange, means of investing, and contract term differs, making it crucial to conduct good research before committing to an investment.