What are the advantages and disadvantages of bitcoin futures?

How do bitcoin futures work?

As with most futures contracts, Bitcoin Futures Trading work on the same principles. Additionally, there are centralized exchanges like Binance that allow for massive risk-taking. 

As an example, let’s say we purchase bitcoin at a $40.000 futures contract, to be settled two months from now.

We are obligated to purchase $40.000 in bitcoin in two months under our futures contract. It is an effective loss of $10.000 per share if the price drops to $30.000 by then. However, if it has dropped to $30.000 by that time, we still have to purchase it at $40.000.

Under the same conditions, we could sell a $40.000 futures contract if we believe the price will drop. In other words, if bitcoin falls to $30.000 by the expiration date, then we can still sell it for $40.000, earning us a profit of $10.000. By expiration, bitcoin should be over $40.000.

A margin is a minimum amount of collateral an BTC Exchange requires to complete a trade. The more money you put into the trade, the higher the margin an exchange would need to complete the trade. We put some money up to accept this obligation, which is called a “margin.” A margin is a minimum amount of collateral you must have in your account to execute a trade. 

In most cases, the margin is 5% to 15% of the value of the underlying asset, so for example, if we buy $1000 of futures contracts worth $40 million, we only put up 5%.

Leverage

You are more exposed to high profit or loss if your leverage is high. Additionally, you can trade based on the margin amount available to you. Binance, for example, offers leverage of about 125 times the trading amount. The level of volatility for your trade depends on your leverage. 

Pros and cons of bitcoin futures

For most cryptocurrency traders, bitcoin futures trading has been a major source of crypto income, but it also comes with some risks. 

Pros

Regulation

A major advantage of bitcoin is the fact that it’s regulated by the Commodity Futures Trading Commission (CFTC). While this might be a turn-off for crypto investors to boycott government regulations, it is a huge plus for bitcoin enthusiasts. It is good to know that CFTC regulations aren’t as strict as those for other investments. 

A set of rules controls the contract and ensures compliance by both investors and speculators. The rules are crystal clear, and the consequences of breaking the rules are clearly outlined. 

Flexibility 

There is another massive benefit to trading bitcoin futures: you are not actually trading bitcoin itself, so you don’t need a wallet or any physical asset to exchange bitcoin. The risk of holding bitcoin that fluctuates in price at any given time is completely eliminated. 

Trading with leveraged positions increase profits

In order to increase your chances of making a profit, most platforms offering bitcoin futures provide position limits and leverage. 

CME, for example, offers about 5,000 futures contracts across different dates and 2,000 front-month futures contracts. In Binance, the largest cryptocurrency exchange by trading volume, you can manually adjust your position limits based on your past trading history and margins. There is also a leverage of up to 125x on the platform.

Cons

Highly technical 

You will need a substantial amount of technical skills to trade bitcoin futures. You will need to know how the crypto market works, study several market forecasts, and develop a trading plan that works. In essence, bitcoin futures are speculative, but professionals can provide valuable market information. However, this is not an easy task, as even the most experienced crypto trader may have difficulty with this. 

High investor requirements

Even though bitcoin futures are an easy way to make money on the market, they are not so accessible to everyone. While you can start with a small amount on centralized exchanges like Binance, they are often very expensive on CBOE and CME. The margin requirement is also about 50%, which is quite high for regular traders, especially when compared to a 10% margin for other assets. 

Since the CME and CBOE only offer bitcoin futures trading to qualified investors, these requirements discourage many crypto investors from participating.