Bitcoin Futures 101: What You Need to Know | Optimus Futures

Bitcoin Futures 101: What You Need to Know

 

Bitcoin Futures

The post below on Bitcoin Futures is the opinion of Optimus Futures. Please note that price movements on Bitcoins are driven primarily by the news and prevailing sentiment of retail speculators. These sometimes dramatic shifts can lead to massive intraday price swings, making Bitcoin Futures a product for aggressive and experienced day traders. The price we have used below may change due to the volatility of the underlying contract.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

How to Trade Bitcoin Futures

Before we begin, we recommend trading Bitcoin Futures on the CME Exchange or CBOE Exchanges.  Under the CME, Bitcoin Futures is categorized under the Equities Group and falls into the CME’s Base Guaranty Fund for futures and options on futures, similar to any newly listed futures. This does not guarantee your profits or losses but ensures that the exchange guarantees against counter-party risk.

Bitcoins: Trading vs Investing

The first thing you need to decide is whether you are interested in holding Bitcoins as a long-term investment or do you want to trade Bitcoins and take advantage of its daily price fluctuations? In our opinion, the idea of Bitcoin Futures is a neat proposition because it allows traders to take advantage of small or large fluctuations on both the upside and the downside by utilizing the leverage of a futures contract.  If you believe that Bitcoin has reached a temporary peak, or is in the early stages of a downtrend, you can short it. Or go long when you think it is resuming its uptrend. Again, you can simply take advantage of the daily price swings and close your positions at the end of the day. Your account is only affected by the commissions and the gains and losses that occur as a result of your trading activity.

Bitcoin Futures Contracts allows traders to go long or short without actually holding the Cryptocurrency. This means traders can get exposure to the price of the Bitcoins without worrying about the security risks associated with storing it. This is similar to trading Energy Futures such as oil where you speculate on its price rather than physically owing oil. Trading in Bitcoin Futures does not require you to own any Bitcoins. As a futures trader, you do not need to worry about hacks, theft, wallets and all the other challenges that actual physical holders may be susceptible too.  Since the launch of Cryptocurrencies, hundreds of millions of dollars have “disappeared”, been hacked or stolen.

Advantages of trading Bitcoin Futures on the CME and CBOE

The CME is the largest and one of the most liquid futures exchange in the world and operates the Standard & Poor’s 500 (S&P 500) Index and the Dow Jones Industrial Average (DJIA), two most widely known stock indexes. CBOE is one of the world’s largest exchange holding companies, offering cutting-edge trading and investment solutions to investors around the world. CBOE offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (ETPs), global foreign exchange (FX), and multi-asset volatility products.

Both exchanges are regulated by the CFTC to avoid price manipulation, fair dealing and price transparency. It oversees some of the most sophisticated risk management practices in the financial world and provides services that substantially mitigate the risk of clearing member failure.

As the world of cryptocurrency gained popularity, many institutions have been formed to trade and invest in the digital currency space.  As such, many of these institutions labeled themselves as an exchange.  It is not our job to decide what constitutes a “proper exchange”. However, very few, if any, of the new players in the markets, have the safeguards that long-standing exchanges such as the CME and CBOE have established in place in order to ensure fair price dealing. When you trade on the CME or CBOE exchanges your funds are not being held by the exchange, there is no spoofing to create fake volumes, nor do they take opposing positions in the marketplace. The gains and losses of your account do not affect the P&L of the exchange.

Your funds will be held by the clearing firm (FCM) you choose. The FCM’s are regulated by the CFTC and the NFA to ensure that your funds are fully separated from their operating expenses, ensuring proper segregation of client money. We highly recommend staying away from corporations that may be adding liquidity by spoofing, markets where players take the other side of the trade or are regulated in countries that have proven to have a very loose grip on unethical players.

We truly believe that the introduction of Bitcoin Futures by the CME and CBOE will not only attract professional traders to reallocate their funds from those so-called exchanges but also open the asset to institutional investors.

Bitcoin Futures Contract Specifications

Bitcoin futures will be listed on CME under the ticker symbol “BCT” and will equal five bitcoins with one tick set to $5 per Bitcoin. A tick is a minimum fluctuation in price allowed for a futures contract during a trading session, meaning CME Bitcoin Futures will be traded in specific increments of $25 (5 BTC x $5). To put that into perspective, the smallest price fluctuation for the ES is 25 cents. CLICK HERE to view all the CME Bitcoin Futures Contract Specs.

The symbol for the CBOE Bitcoin Futures is “XBT” and will equal one bitcoin with the minimum tick interval at 10 points (equal to $10.00 per contract). CLICK HERE to view all the XBT Bitcoin Futures Contract Specs.

How are Bitcoin Futures Contracts Priced?

CME Bitcoin Futures Prices

The CME will use a daily price from the CME CF Bitcoin Reference Rate, which is also supported by digital exchanges Bitstamp, GDAX, itBit, and Kraken. The CME CF Bitcoin Reference Rate (“BRR”) is a daily reference rate of the U.S. Dollar price of one bitcoin as of 4:00 p.m. London time. It is representative of the bitcoin trading activity on Constituent Exchanges and is geared towards resilience and replicability. It assures that the pricing of the Futures market is accurate and fluctuations in price reflect the reality of the Bitcoin fundamentals.  In laymen terms, the CME is using what is considered a credible source of information so you can just focus on trading futures. We believe that as the Bitcoin Futures on the CME exchange gains popularity and liquidity amongst traders, it will also be a major force in determining the price of Bitcoin. CLICK HERE to learn more about the methodology.

CBOE Bitcoin Futures Prices

CBOE’s XBT futures contracts are based on the auction price of bitcoin in U.S. dollars on the Gemini Exchange. XBT futures are designed to reflect economic exposure related to the price of bitcoin. The final settlement value for XBT futures will be the official auction price (rounded to the nearest penny) for bitcoin determined at 4:00 p.m. Eastern time on the final settlement date by the Gemini Exchange.

What is the Total Cost of Trading Bitcoin Futures?

In order to participate in any futures market, traders have to pay for several transaction costs that make up your total commissions. There are four basic types of fees incurred every time you trade a single bitcoin futures contract, assessed on a per-contract basis. For every contract traded, the following fees are passed on to the trader.

1: CME/CBOT Exchange/Clearing Fees (FCM + Exchange)

2: National Futures Association (NFA) Regulatory Fees

3: Execution Fees (Technology / Order Routing)

4: Brokerage Commissions

5: Market Data: $5 from the CME, and $15 for the CBOE.

You pay on a per contract basis versus a percentage of your investment as in OTC exchanges. With Optimus Futures, you pay as little as $0.50 / side in commissions no matter how much you trade. Clients who meet our daily trading volume thresholds qualify for even more savings with deeply discounted commissions as low as $0.10 / Side on Bitcoin Futures.

CLICK HERE to view the Bitcoin Futures Pricing that applies to most retail traders and understand all the costs associated with trading Bitcoin Futures.

As opposed to other Cryptocurrency brokers, we do not charge you extra for leverage and you do not pay based on the equity you purchase. This should by itself save you tremendously and could potentially help your P&L (profit and loss). Since Optimus Futures has clearing relationships with multiple Futures Commission Merchants (FCM’s), Data Vendors and Trading Platforms, we have a lot of flexibility to find you the cheapest combination of order routing, execution and clearing costs to trade Bitcoin Futures based on your level of funding, margin, and platform requirements.

Will there be any Price Limits on Bitcoin?

Price Limits for the CME Bitcoin Futures: 

Price Limits are hard and soft limits imposed by the CME exchange where they cease all trading to protect the price integrity of the buyers and sellers. Why is that necessary?  We live in a world of unfiltered news, algorithms, and HFTs.  There could be a number of events that can trigger a rapid or sudden price decline. As such, sometimes it is necessary to investigate whether such news or events justify such drastic price movements. This is one of the advantages of trading on a regulated exchange.

The first two price limits, +/- 7% and +/- 13%, are soft limits. The next limit is a hard limit of 20%.

After these limits (limited op or limit down) are hit in the lead month, a 2-minute pause will occur and the price could not exceed these limits, however, prices would continue trading within the limit bands but not exceed the price limit band.

At the end of the two minutes, prices may continue trading to their hard limit of +/- 20%.

Price Limits for the CBOE Bitcoin Futures: 

The CBOE Bitcoin Futures XBT contracts are not subject to price limits. However, the CBOE will apply a two-minute halt if prices are above or below the settlement price.   After trading commences following such a halt, trading in XBT futures will be halted for 5 minutes if during regular or extended trading hours for XBT futures the price will go 20% above or below the previous settlement price.

What are the Margins on Bitcoin Futures?

Futures trading gives you the ability to use leverage by allowing you to control large dollar amounts of Bitcoins with a small amount of capital. This amount of capital that is used out of your account when trading a futures contract is known as margin.

As of December 12, and subject to change, the Maintenance Margin for the BTC future is 43%, where the Initial Margin for Hedger is 100% of the maintenance margin and the initial Margin for Speculator is 110% of that number. Margin offsets with other CME products will not be offered initially. Cboe has set the initial margin at 44% of the current daily settlement price. For current margin rates, please visit the exchanges’ Websites listed on our Exchange Access Page.

CME Example: Let’s assume Initial Margins are 40%, what does that mean? Since one BTC contract will contain five bitcoins, the nominal size of the Bitcoin Futures Contract would be worth $75,000 at current prices. (5 x $15,000). So you would need roughly $30,000 to trade 5 Bitcoins.

CBOE Example:  If XBT Futures are trading at $15,000 the margin would be $15,000X.44=$6,600.  CBOE notional value of each contract is one.

The margin calculations above are based on a 15K Bitcoin. As you probably know the prices of Bitcoin are highly volatile and subject to change.  Margins, although determined by the exchanges, could be different than what FCMs and brokers require.

Day Trading Margin Requirements for the Bitcoin Futures Contract

Day trading margins are determined by our clearing firms and are typically provided as a percentage of the initial margin or a dollar amount. CLICK HERE to view the day trading margin requirements for the Bitcoin futures contract available from each of our clearing firms. This is the amount of money you need to daytrade the Bitcoin contract i.e. getting in and out of the market before the trading session ends. Day Trading Margins are based on many factors, including market volatility, open interest, customer credit profile and the level of funding in the specific customer’s account.

The cryptocurrency technology is new technology and it is evolving rapidly with new and influential players entering the space every day.  As such, rumors, whether substantiated or not, can affect the pricing in very extreme ways. Unlike other asset classes (FX, Equities, Commodities, etc.), the Bitcoin market is dominated by retail speculators. As such, we believe that you should not extend your trading beyond day trading and NOT leave positions for overnight or the weekend.  Our main concern is the price gaps that can occur and affect your account adversely.

We do not encourage anyone to trade with a higher number of contracts due to a higher level of risk-reward. However, qualified clients are eligible to receive reduced Day Trading Margins on Bitcoin Futures.  Please call us today at (800) 771-6748 / Local (561) 367-8686 or send an email to general@optimusfutures.com to discuss further. (Put bitcoin futures on the subject).

Bitcoin Futures are Cash-Settled

You do not have to worry about delivery when trading Bitcoin Futures. A settlement will be determined at the end of the trading month’s trading period and your positions will just expire. The expiration price will determine your P&L (profit and loss). We suggest that you always trade in the liquid month. This means that once the liquidity of the Futures contract has started going down, you should trade the next month. Again, as we mentioned above, the advantage of trading with Bitcoin Futures is that you can enjoy the benefit of speculating in them without actually owning it.

Bitcoin Futures Trading Platform

With the introduction of Bitcoin Futures, you can now take advantage of the massive selection of futures trading platforms that connects to the CME, opening the technology that was previously only available to Commodity Futures traders. Experience fast order routing through industry-leading trading platforms powered by multiple data feeds from some of the biggest names in the trading technology field. See your orders working on the CME exchange in real time and execute your trades on the charts, DOM or an easy order entry module. You can use limit orders, stop orders to minimize risk, and trailing stops as the market goes in your favor. Set up strategy orders that allow taking advantage of volatility whether it is on the downside or upside.

Trade on desktop, mobile or web. The Futures industry is a mature industry and as such has evolved to execute and create strategies for very sophisticated traders. Whether you need trailing stops, get out at different levels while reducing your positions, and/or create time-based orders, you will find that the Futures trading platforms are very adaptable to it. Disclaimer:  The placement of contingent orders by you such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.

Options on Bitcoin Futures

Note: Bitcoin Futures Options are not available yet via the exchanges.  Once they are available, we will update this notice. 

Bitcoin Futures will also allow puts and call on the Futures contract. This can help traders who wish to speculate on Bitcoin but want to limit their risk. You can bet on the direction of the upside using calls, and use Puts for the downside.  When you buy Options and go long on premium, all you can lose is the cost of the Options and the commissions you paid. However each Options has a time expiration, and at the time of expiration, you can lose the entire premium of the Options and the commissions you paid for it.

Trade IRA Funds with Bitcoin Futures

An IRA (Individual Retirement Account) is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. All IRA’s are held for investors by custodians or trustees. We work with a number of IRA custodians that work directly with the Futures industry.  Once you select a custodian, simply Open an Account with us with the clearing firm of your choice and we will work with the custodian to complete all the necessary paperwork to establish your new IRA. If you need help determining the right custodian and clearing firm, please contact us and one of our licensed brokers will help you choose the combination best suited to your goals. Offering multiple FCM’s and custodians gives us a lot of flexibility to match you with your trading needs. However, since these are IRA funds, you MUST exercise caution in allocation such funds. Speculation in Futures carries high risk.

Trade Bitcoin Futures with Optimus Futures

  • Increased opportunities – Go long or short on Bitcoin with a single click and get lightning fast order execution.
  • Hassle free – No need for a Cryptocurrency wallet, just log in or open a live or demo account in minutes.
  • Safe & Secure – All our clients’ funds are kept in segregated trust accounts
  • Fully Regulated – Optimus Futures is licensed and regulated by the NFA. No need to worry about unregulated cryptocurrency exchanges.

Simply Open an Account to start trading Bitcoin Futures today!

Disclaimer: Virtual currencies including Bitcoin experience significant price volatility, and fluctuations in the underlying virtual currency’s value between the time you place a trade for a virtual currency futures contract and the time you attempt to liquidate it will affect the value of your futures contract and the potential profit and losses related to it. Be very cautious and monitor any investment that you make. There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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