$BTC has experienced a meteoric rise in popularity over the past decade. Yet many investors remain skeptical of the cryptocurrency market because of its decentralized nature, questionable security, unclear regulation and extreme volatility.
Despite these downsides, Bitcoin took a major step toward legitimacy in October 2017 when CME Group, the world’s leading derivativesmarketplace, launched trading of Bitcoin futures contracts.
Four years later, ProShares made history again by launching a Bitcoin ETF based on futures contracts, the first ever crypto exchange-traded fund to gain regulatory approval to trade on a major U.S. market.
#bitcoin futures offer investors a unique way to speculate in the crypto market and hedge their crypto holdings. But before you dip your toes into crypto futures, we’ll help you understand how they work and the risks involved
What Are Bitcoin Futures?
Futures are a type of derivative contract that obligate two parties to exchange an asset—or a cash equivalent—at a predetermined price on a future date.
When investors buy and sell Bitcoin futures contracts, they are speculating about BTC’s future price. In essence, two parties make a bet: One believes the BTC will go up in price in the future, and another bets BTC will fall in price. The person who gets it wrong pays the other party a cash settlement.
There are various futures contracts, for currencies, stock indexes and commodities. The Commodity Futures Trading Commission (CTFC) regulates the overall futures market, and the agency considers Bitcoin a commodity, so Bitcoin futures are commodity futures.
Bitcoin futures contracts trade on the Chicago Mercantile Exchange (CME), which introduces new monthly contracts for cash settlement.
The CME offers monthly BTC futures contracts for six months and additional quarterly contracts for each of the four upcoming quarters. CME Group also offers an additional December contract if only one is listed.
Are Bitcoin Futures a Good Investment?
Much like the cryptocurrency market itself, there are several pros and cons for investors when it comes to Bitcoin futures. Futures contracts can provide investors with flexibility, leverage and the potential to mitigate risk via hedging.
But leverage can be a double-edged sword for investors, and futures trading losses can add up quickly if the market takes a bad turn.
In addition, Bitcoin futures traders are subject to margin calls that can trigger forced liquidation of their positions at the worst possible time if they cannot maintain minimum margin requirements in their accounts. Bitcoin futures traders are also subject to exchange fees, which can affect trading profits.
