Résumé
Bitcoin futures contracts are derivatives similar to traditional futures contracts. Two parties agree to buy or sell fixed amounts of Bitcoin for a specific price on a given date. Traders use them for speculative purposes, but you can also use them to hedge. Hedging is especially popular among miners who need to cover their operating costs.
Futures are a great way to diversify your portfolio, trade with leverage, and provide some stability to your future income. If you want to explore more advanced strategies with futures, take a look at arbitrage. Spot/futures arbitrage and inter-exchange arbitrage offer lower-risk trading opportunities when executed correctly.
Introduction
Bitcoin futures are an alternative investment opportunity to simply holding coins and tokens. As a more complex product, they require a deeper understanding to trade safely and responsibly. While more difficult to use, futures do offer ways to protect against bear markets by hedging and to realize profits through short selling.
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What are Bitcoin Futures Contracts?
Bitcoin futures contracts are financial derivatives similar to traditional futures contracts. Simply put, you can agree to buy or sell a fixed amount of BTC for a specific price (the futures price) on a specific date. If you take a long position (agree to buy) on a Bitcoin futures contract and the market price is higher than the futures price on the expiration date, you make a profit. The futures price is an estimated fair value of an asset derived from its spot price and other variables. We’ll cover this in more detail later in the article.
If the market price is lower than the futures price at expiration, you lose money and the short position is a winner. A short position occurs when a trader sells an asset that they have borrowed or own while expecting the price to fall. The trader then buys the asset back at a later date to realize a profit. You can settle contracts physically by exchanging the underlying asset or, more commonly, through cash settlements.
Why do people use Bitcoin futures?
One of the main use cases for Bitcoin futures is the opportunity for buyers and sellers to lock in a future price. This process is called hedging. Futures have traditionally been used as hedging instruments in commodity markets, where producers need stable gains to cover their costs.
Traders also use futures contracts for speculation. Long and short positions allow you to bet on the state of the market. In a bear market, it is still possible to make money by taking a short position. There are also several arbitrage opportunities as well as sophisticated trading strategies.
The Benefits of Bitcoin Futures Trading
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While hedging may seem more useful in physical commodity markets, it can also be used in cryptocurrency. Bitcoin miners pay operating fees, just like farmers, and they rely on a fair price for their products. The hedging process involves using both the futures market and the spot market. Let’s see how it works.
Contracts futures contracts
A Bitcoin miner can take a short position in a futures contract to protect his BTC holdings. When the futures contract expires, the miner will have to settle the agreement.
If the price of bitcoins in the futures market (mark price) is higher than the futures price of the contract, the miner will have to pay the difference to the other party. If the mark price is lower than the futures price of the contract, the other party taking the long position will pay the difference to the miner.
The cash market
On the day the futures contract expires, the miner sells his BTC on the spot market. This sale will give him the market price, which should be close to the benchmark price on the futures market.
However, the spot market will cancel out any gains or losses made in the futures market. The two sums together provide the miner with the hedged price he wanted. Let's combine the two steps to illustrate with numbers.
Combination of spot and futures trading
A miner takes a short position on a contract for one BTC at $35,000 in three months. If the mark price is $40,000 at expiration, he will lose $5,000 when settling the long position on the same contract. At the same time, the miner sells one BTC on the spot market, where the spot price is also $40,000. The miner receives $40,000, which covers his $5,000 loss and leaves him with $35,000, the covered price.
Leverage and margin
An attractive feature for investors is trading on margin. Margin allows you to borrow funds and take larger positions than you could normally afford. Larger positions result in bigger profits because price movements are magnified. Conversely, your initial capital can be quickly liquidated if the market moves against your positions.
An exchange displays leverage as a multiplier or percentage. For example, 10x multiplies your capital by 10. So, $5,000 with 10x leverage will allow you to trade $50,000. When you trade using leverage, your initial capital covers your losses and is known as margin. Let’s take an example:
You buy two Bitcoin quarterly futures contracts at $30,000 each. Your exchange allows you to trade these with 20x leverage, meaning you only put up $3,000. This $3,000 acts as your margin, and the exchange will deduct your losses from it. If you lose more than $3,000, your position will be liquidated. You can calculate the margin percentage by dividing 100 by the leverage multiple. 10% is 10x, 5% is 20x, 1% is 100x. This percentage tells you how much the price can fall from where your contract was before liquidation.
Portfolio diversification
With Bitcoin futures, you can further diversify your portfolio and use new trading strategies. It is recommended to create a well-balanced portfolio with different currencies and products. Futures are a must-have for the different trading strategies they offer you rather than HODLing. There are also less risky arbitrage strategies with lower profit margins that can reduce the overall risk of your portfolio. We will come back to these strategies a little later.
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Bitcoin Futures on Binance
Not all futures contracts are the same. Different exchanges have different mechanics, expirations, pricing, and fees on their futures products. Binance currently offers a few options that differ mainly in their expiration date and funding.
Date d'expiration
So far, we have only mentioned futures contracts with a set expiration date. Binance futures exchange offers quarterly futures contracts, but you can find monthly and semi-annual maturities (expiration dates) on other exchanges. You can quickly check the expiration date of a contract from its name.
Bitcoin quarterly futures contracts on Binance expire in the following months: March, June, September, and December, respectively. For example, a BTCUSD quarterly 0925 contract will expire on September 25, 2020 at 08:00:00 UTC.
Another popular option is to trade perpetual futures contracts with no expiration date. Losses and gains are treated differently than quarterly futures contracts and involve financing fees.
Financing costs
When you enter a Bitcoin quarterly futures contract on Binance, you must maintain your margin to cover any losses. However, you will only pay this loss when you are liquidated, or when the contract expires. With a perpetual futures contract, you must also pay or receive a financing fee every eight hours.
Funding fees are periodic payments to traders. These rates prevent any divergence between the futures price of Bitcoin perpetual contracts and the reference price. The reference price is similar to the BTC spot price, but it is designed to prevent unfair liquidations that can occur when the market is highly volatile.
For example, a spot market trade could temporarily increase the price by thousands of dollars. This volatility could liquidate future positions, but is not truly representative of the actual market price. You can see the funding rate highlighted in red below and the settlement time.
A positive funding rate means that the perpetual contract price is higher than the benchmark price. When the futures market is bullish and the funding rate is positive, long traders pay the funding rate to short positions. A negative funding rate means that perpetual contract prices are lower than the benchmark price. In this case, short positions pay the fees to long positions.
To learn more about the funding rate, which can be quite complex, check out the article Introduction to Binance Futures Funding Rates.
COIN-M and USDⓈ-M Futures Contracts
Binance offers two options for trading futures: COIN-M futures with cryptocurrency margin, while USDⓈ-M futures use BUSD/USDT as margin. Both types of contracts are available as perpetual futures, but there are slight differences between them.
COIN-M futures contracts must use the contract’s underlying asset as collateral in your futures margin account. USDⓈ-M futures contracts, on the other hand, allow you to use cross-collateral. This feature allows you to borrow USDT and BUSD at 0% interest, using crypto assets in your Spot Wallet as collateral.
COIN-M futures are generally more popular among miners looking to hedge their Bitcoin positions. Since settlement is done in cryptocurrency, there is no need for them to exchange their BTC for stablecoins, which would add an extra step to the hedging process.
How to start trading Bitcoin futures?
If you want to start trading Bitcoin futures on Binance, all you need to do is set up an account and fund it. Here’s a step-by-step guide to trading your first Bitcoin futures contract:
1. Create a Binance account and enable 2FA (two-factor authentication). If you already have an account, make sure 2FA is enabled to be able to deposit funds into your futures account.
2. Buy BUSD, Tether (USDT) or other supported cryptocurrencies for futures trading. The easiest way is to buy them with your credit card.
3. Go to the Bitcoin futures overview and select the type of contract you want to buy. Choose between COIN-M and USDⓈ-M futures and between perpetual or expiry.
4. Choose the leverage level that suits you. You can do this to the right of the [Cross] button on the trading user interface. Remember that the higher the leverage, the more likely you are to get liquidated during small price movements.
5. Select the amount and order type you want to use, then click [Buy/Long] or [Sell/Short] to open your Bitcoin position.
For more detailed instructions, check out The Ultimate Binance Futures Trading Guide.
Bitcoin Futures Arbitrage Strategies
We’ve covered the basics of long and short trading, but that’s not all you can do. Futures have a long history of arbitrage strategies similar to those in forex markets. Traders use these techniques in traditional markets, and they’re also adapted to crypto.
Arbitrage inter-exchange
When different cryptocurrency exchanges offer futures contracts at different prices, there is an opportunity for arbitrage. By buying a contract on the cheaper exchange and selling another on the more expensive one, you can earn the difference.
For example, imagine that a BTCUSD Quarterly 0925 futures contract on Binance is $20 cheaper than on another exchange. By buying one contract on Binance and selling one contract on the more expensive exchange, you can arbitrage the difference. However, prices change quickly due to the presence of trading bots. You need to be quick, as any differential can disappear while you are making your trades. Also factor in any fees you may have to pay into your profit calculations.
Spot/Forward Arbitrage
Spot/futures arbitrage is not new to futures contracts and is a market neutral position. Market neutral positions involve buying and selling an asset at the same time in equal amounts. In this case, a trader takes a long and short position on an equal amount of identical futures contracts, regardless of their price. Cryptocurrency futures contracts offer a significantly higher profit margin for spot/futures arbitrage than traditional commodity futures contracts.
It has a lower level of trading efficiency compared to older markets and greater arbitrage opportunities. To use this strategy successfully, you need to find a point where the BTC spot price is lower than the futures price.
At this point, you simultaneously take a short position with a futures contract and buy the same amount of bitcoins on the spot market to cover your short position. When the contract reaches maturity, you can settle the short position with your purchased bitcoins and arbitrage the initial spread.
So why does this opportunity arise in the first place? People are willing to pay a higher futures price if they don’t have the money to buy BTC now, but believe the price will increase in the future. Let’s say you think BTC will be worth $50,000 in three months, but it currently costs $35,000.
You don't have any funds available right now, but you will in three months. In this case, you can enter a long position for a small premium at $37,000 for delivery in three months. The spot/futures arbitrageur essentially holds the BTC for you, for a fee.
Trading doesn't have to be difficult
To conclude
Bitcoin futures trading takes a proven derivative of traditional finance and brings it to the world of cryptocurrencies. Cryptocurrency futures markets are now extremely popular and are featured on trading platforms with high trading volume and liquidity. However, trading Bitcoin futures carries a high level of financial risk, so make sure you understand how futures trading works before you get started.
