Bitcoin Futures: Getting Started

Shorting Bitcoin: A Guide to Getting Started

Bitcoin Futures: Getting Started

This week marked a historic milestone for Bitcoin and cryptocurrency. The CBOE launched futures trading on its exchange. In the excitement of the first hour the price of Bitcoin jumped over $1,000 above $17,000.

Trading Has Been “Orderly”

Trading continued without incident though the CBOE’s volatility sensors aka “circuit breakers” were triggered two times in the first six hours post launch.

Michael Mollet, of the CBOE described the first day as “orderly” and indicated that the rules in place for volatility worked as expected.

Orderly and as expected is good news for everyone involved in Bitcoin. This is a first indication that the traditional financial sector and Bitcoin just might play nice together.

If you were waiting to see how the launch of futures shook out for Bitcoin and futures traders, it seems the coast may be clear. (Though let us all remember cryptocurrency has been historically wild and volatile).

If you’d like to try your hand at Bitcoin futures, here’s how to get started.

What are Futures

Futures are a way to invest in Bitcoin without purchasing any BitcoinTo do this, you leverage a financial derivative. Through futures investing, you enter into a contract with another investor agreeing to purchase Bitcoin at a set price sometime in the future.

What are Options

Options are another Bitcoin derivative that empowers you to buy or sell Bitcoin for an already set price.

Put Options & Call Options

If you think the price of Bitcoin will fall, you would invest in put options so you can sell your futures contract later at a higher rate than the market sits.

Call options are used when you think Bitcoin prices will rise. You would use these call options as a vehicle to buy Bitcoin in the future when the price is higher, with your locked-in lower rate.

Why Bitcoin Futures Over Simply Buying Bitcoin?

It is a more familiar method of investing for most. Traders and brokers trade in futures daily while cryptocurrency is largely a foreign concept to most traders and financial advisors.

You can avoid the security risks that the cryptocurrency industry faces like wallet hacks and losing private keys.

And as with all futures trading, you are afforded leverage. Meaning you can essentially borrow what you need for an initial investment, while still pocketing the full profits you gain. This maximizes profit potential (and also maximizes loss magnitude).

Margin Trading

With Bitcoin futures trading comes the ability to margin trade. This is a risky but highly profitable method traders have used for years.

Buying on margin means to purchase stock (or Bitcoin) from a broker on loan. Basically you’re taking out a mini-mortgage to get your hands on some Bitcoin.

To enact this special kind of trading you first need a margin account which is different than a cash account used for most other types of trading.

The margin account must be set up by a broker, requires your signature and at least $2,000 (if not more).

Once your margin account is activated you can start margin trading by buying up to 50% of a stock. You do not have to borrow 50% of a stock however, you can borrow whatever amount you feel comfortable with.

After selling on a margin trade, the initial proceeds go to pay back your broker’s “loan”. Then you also have to pay back what’s called the maintenance margin which is essentially the buffer amount required before you would need to deposit more funds or sell stock. If this were to happen it would be called a margin call.

What you need to get started Bitcoin Futures Trading

First you need to assess your investment fitness for Bitcoin and Bitcoin futures. This market is notoriously unpredictable and while the last year has been undeniably exciting, it bears repeating, invest responsibly. 

Another consideration is time. Bitcoin fluctuates incredibly rapidly. This is not an investment you can set and forget. This type of investment will require near constant attention, daily monitoring of performance and assessment of ongoing trends.

Finally, you need to learn the cryptocurrency language. Spend time learning the vocabulary and key terms within the blockchain and Bitcoin industry. While you might not be purchasing Bitcoin directly, it is imperative that you understand the industry enough to make informed decisions about your futures contracts.

Where To Trade Bitcoin Futures

There are multiple exchanges available to allow for trading Bitcoin futures. You may trade Bitcoin futures in unregulated or regulated exchanges.

Regulated Exchanges

At this time only two exchanges offer regulated futures trading of Bitcoin. Nasdaq indicated it will offer Bitcoin futures trading in 2018.

Chicago Mercantile Exchange (CME) Group

Chicago Business Options Exchange (CBOE)

Unregulated Exchanges

These exchanges do not wish to be regulated so they enforce certain acceptance criteria in order to open an account.

Deribit in the Netherlands

BitMEX in the Seychelles

 OKCoin in Belize (main office in Hong Kong)

To Implement

The mechanism of creating an account, adding, funds and setting your position is similar across these exchanges in concept. The unregulated exchanges exclusively deal in cryptocurrency while the regulated exchanges deal only in fiat.

In Closing

Make sure you are comfortable with all the concepts of futures trading before you step into the realm of futures trading. Understanding the best position is an advanced technique that requires education and analysis.


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