The day is finally here! The Cboe Futures Exchange, a division of the Cboe Global Markets Exchange is now offering bitcoin futures. Hurray! Use this quick guide to learn how to trade bitcoin futures. If you like our content, please share us on Facebook and Twitter!
Quick n’ Dirty Summary:
- tastyworks is one of the few brokerages that let clients trade bitcoin futures
- Trading bitcoin, let alone futures, is risky due to extreme volatility
- Bitcoin futures allow you to trade bitcoin nearly 24hrs/day 6 days/week
- Cash-settled, highly regulated marketplace, deep liquidity
How to Trade Bitcoin Futures
At The Options Bro, we love all things options and futures. We have been waiting for bitcoin futures for a few years now and we’re absolutely ecstatic that they are finally here. Before you start trading futures, there are a couple of things you need to know.
First, futures (like options) are contracts known as “derivatives,” because their price is derived from an “underlying” instrument.
In the case of bitcoin futures, which trade with the ticker symbol “XBT”, the price of XBT will directly depend on the price of bitcoin. This means that when bitcoin/usd trades up 20% in one day, XBT will theoretically trade up 20% as well.
Step 1: Open an Account with tastyworks
Currently, tastyworks is one of the few brokerages that permit bitcoin futures trading.
Although we like TD Ameritrade, their futures contract pricing is absurd. Trades cost $2.25 per contract plus exchange fees. That’s a minimum of $4.50 roundtrip for just one contract! If you make ten roundtrip trades a day of two contracts per trade, that’s $90 in fees in a single day! Ridiculous!
tastyworks, on the other hand, offers futures trading for what it should cost. $1.25 per contract, plain and simple. Plus, if you trade a significant amount of contracts in a calendar month, you could likely negotiate lower commissions.
Step 2: Funding
Once your tastyworks account is open, you’ll have to fund it to trade bitcoin futures. This can be accomplished via a wire transfer, ACH, or check deposit. Because tastyworks is an innovative online brokerage, you’ll get full and free access to professional trading tools. You can trade bitcoin futures with their excellent mobile trading application, or their desktop trading software. Needless to say, tastyworks is on the cutting-edge of futures trading.
What are XBT Bitcoin Futures?
Simply put, bitcoin futures are a tradable contract that require the buyer to purchase bitcoin at a specific price on a specific date in the future and they require the seller to sell bitcoin at a specific price on a specific date in the future.
However, since bitcoin futures are cash-settled, there is no need to take delivery or make delivery of actual bitcoin! All transactions happen in the current US dollar value of the cryptocurrency.
Why You Should Trade Bitcoin Futures
Bitcoin futures allow you to trade virtually 24 hours a day, 6 days a week in a very liquid market place that is regulated and trusted by droves of institutional traders.
The reason why were so excited about bitcoin futures is that they have more than one use. Of course you can speculate on the price of bitcoin by buying/selling bitcoin futures, but you can also hedge an existing long/short position without having to unload your actual BTC.
As the Cboe states on their website, “The single price settlement process gives participants the option of using XBT futures to hedge their exposure in underlying bitcoin or gain exposure to traded bitcoin prices without holding bitcoin.” This is incredibly convenient and will likely change the cryptocurrency space as we know it.
Speculation and Expiration
Futures contracts have been around for a long time, and they’re a simple yet brilliant concept. Originally, they were used primarily for hedging, but they have now become very popular with speculators.
If you want to buy bitcoin (betting that the price will increase) all you would have to do is buy the front-month bitcoin future.
If you want to short bitcoin (betting that the price will decrease) all you would have to do is sell the front-month bitcoin future.
The front month future, for bitcoin or any other investment instrument, always trades the most volume out of any of the contract expirations. As the expiration date nears, traders will either close out their position or role it into the next month’s contract which will then become the front-month contract.
An Oil Futures Example
Say an oil producer wants to protect himself against future declines in the price of oil in the next six months. If the price of oil goes up, he doesn’t care because he physically owns the oil.
However, if the price of oil declines, he will be in trouble because he’ll lose money on his current oil inventory; it will be worth less and his profit will be lower. So what is the best way for this oil producer to protect against a decline in the price of oil? With oil futures, he could sell the appropriate amount of oil with six months until expiration, also known as the delivery date of the futures contract. By selling the appropriate amount of oil futures at the current market price, he is literally selling his current oil inventory six months in the future and fully protecting his downside. Miners of bitcoin can use the exact same concept.
Bitcoin Futures Trading Hours
|Type of Trading Hours||Monday||Tuesday – Friday|
|Extended||5:00 p.m. (Sunday) to 8:30 a.m. CST||3:30 p.m. (previous day) to 8:30 a.m. CST|
|Regular||8:30 a.m. to 3:15 p.m. CST||8:30 a.m. to 3:15 p.m. CST|
- Futures Symbol – XBT
- Final Settlement Value Symbol – XBTS
- One XBT contract = one bitcoin
- 10.00 points USD/XBT (equal to $10.00 per contract)
- 1,000 contract long or short futures position limit in front-month contract
From the Cboe XBT prospectus, bitcoin futures will be halted for 2 minutes if:
- (A) the best bid in the XBT futures contract closest to expiration is 10% or more above the daily settlement price of that contract on the prior Business Day; or
- (B) the best offer in the XBT futures contract closest to expiration is 10% or more below the daily settlement price of that contract on the prior Business Day.
After trading commences following such a halt, trading in XBT futures will be halted for 5 minutes if:
- (A) the best bid in the XBT futures contract closest to expiration is 20% or more above the daily settlement price of that contract on the prior Business Day; or
- (B) the best offer in the XBT futures contract closest to expiration is 20% or more below the daily settlement price of that contract on the prior Business Day.
Know the Risks
It almost goes without saying, but bitcoin is an extremely volatile asset. It can move up or down 20% in one day without breaking a sweat. To put that in perspective of other assets, the only time the S&P 500 Index was down 20% in one day was the infamous Black Monday crash of 1987. So when trading bitcoin futures, be very careful not to size your positions too big. Whether you’re long or short, futures offer a lot of leverage.
Hopefully, the bitcoin futures circuit breakers will prevent large movements from happening too frequently, but still – bitcoin can be dangerous if you’re on the wrong side.
With that said, if you’re right about the direction of bitcoin, XBT futures will open up a whole new world of profit potential amid all of the volatility and wild price swings.