In this article, we’ll know about bitcoin Futures (derivatives)platforms and learn how to trade on these platforms.
‘Futures‘ is a financial instrument that is a standardized, exchange trade-able contract which binds two parties to trade its underlying asset for a set price, on a set date in the future.
Usually, the derivatives traded on cryptocurrency derivatives exchange are ‘perpetual swaps.’
Essentially, perpetual swaps are similar to futures contracts but it comes without an expiry date. The funding and margin are two important components of these contracts which determine the position of a trader. Normally, the contracts traded on derivatives exchanges like BitMEX, Okex, etc. are perpetual contracts.
Then there are regulated institutions and platforms like CME and Bakkt which offer the traditional futures and options contracts well.
History of Crypto Futures Contracts
Bitcoin derivatives contracts started trading as early as 2011 with ICBIT, which offered arbitrage and limit orders on Bitcoin.
Later, OKCoin (now Okex) offered futures contracts on Bitcoin which were considered popular. Nevertheless, the field witnessed a massive change with the perpetual swaps offered by BitMEX.
The space at the time was riddled with scammers, disingenuous websites, and vulnerability which made trading derivatives on it really difficult. Manipulations in the market were one of the most pressing issues which kept institutional money away from these contracts.
BitMEX founded in 2014 by Arthur Hayes, Ben Delo and Samuel Reed is the leading platform in the space and the most popular derivatives exchange since 2016. Their innovative perpetual contract was the first of its kind and has replicated across numerous platforms.
On 17th December 2017, the CBoe launched the first institutional platform for trading futures on the platform. CME launched its derivative platform on the following day. Co-incidentally, as the shorting instrument grew potent, it marked the ATH in Bitcoin as well,
Since then, a couple of cryptocurrency derivatives platforms and products (like the introduction of options contracts) have been launched. Bakkt’s physically settled futures and options contracts being the most popular among them. After much deliberation and delay due by regulatory bodies, Bakkt was finally launched on 23rd September 2019.
Regulated Derivatives Exchanges
CME Bitcoin futures is the leading institutional platform which offers traditional futures contracts on Bitcoin [BTC]. The contracts are traded on a monthly basis.
These contracts are cash-settled, that is the profit or loss from trading is paid for in US Dollars.
The primary aspect of consideration of futures markets is contango and backwardation. Contango implies that the rate of the futures prices of the assets is increasing with time. While Backwardation implies that the future prices of these assets are in a downtrend.
At times, when the trend in the market is strong or traders expect huge gains ahead, the difference in futures prices are large as well.
How to Trade on CME?
To trade futures, the first step is opening an account with a registered broker. Brokerage firms are known as either a futures commission merchant (FCM) or an introducing broker (IB). They primarily form a link between the futures exchange and the individual traders, since individual traders cannot directly trade on the exchange.
The list of brokers for CME is shared here. Currently, there are 328 brokers listed for the exchange. The selection of brokers depends on the customer type, market specialization, products, country and language supported.
How to Trade on other Regulated Platforms like Bakkt and LedgerX?
Platforms like Bakkt, LedgerX and ErisX come next with their physically settled regulated exchanges. These contracts are similar to the ones on non regulated exchanges like BitMEX. Bakkt’s cold and warm wallets are covered by a $125,000,000 insurance policy from a leading global syndicate.
These exchanges offer futures contracts which are settled in physically settled, i.e. in Bitcoin itself. Bakkt also offers contracts listed on ICE Futures Singapore and cleared by ICE Clear Singapore, which is physically settled.
Bakkt’s contracts are offered by Intercontinental Exchange’s (ICE) which backs the federally regulated futures exchange and clearinghouse. It is a one-in-all platform that includes custody and payment solutions as well.
The minimum block trade size is 10 contracts. Trading hours are 8:00pm EPT to 6:00pm EPT, Sunday to Friday.
LedgerX is another institutional trading and clearing platform with approval from the U.S. Commodity Futures Trading Commission (CFTC). Registration on platforms like Bakkt and LedgerX can be done directly on their online platform itself unlike with CME brokers.
ErisX, Seed CX and Tassat are a few other regulated exchanges in the US markets approved by the CFTC.
How to Trade on Non-Regulated Exchanges?
There are other centralized exchanges which are not licensed by a regulatory agency like CFTC but are registered as independent businesses. The most popular among them is BitMEX, registered at Seychelles. These exchanges which include OKex and Huobi (situated in Asia) are ‘lightly regulated’ and need to comply with FATF and tax rules in the country.
The difference between spot exchanges and derivatives exchange entails in the fact that spot enables a direct purchase and selling of cryptocurrencies. The derivatives exchange allows margin trading which is usually settled in cryptocurrencies itself.
Stablecoins (dominantly USDT) as the underlying pair in trades usually solves this issue by settling in virtual cash – Bitfinex, Poloniex and Binance are the exchanges which offer USDT margin trading pairs.
Many of the leading derivatives platforms do not require KYC or AML verification. These include BitMEX, ByBit, Deribit, Phemex, FTX, Coinflex and so on. The deposits and withdrawals are made in crypto itself, usually Bitcoin, Ethereum or XRP.
The usual steps involved in the registration of non-KYC exchanges are:
- Enter Name and email address and set a password for your account
- Verify email address
- In the Deposit/Wallets Tab copy the deposit address of the respective cryptocurrency
– With derivatives only exchange the depositing an amount is dedicated as margin for trading
– Exchanges with both spot and derivatives markets have a separate allocation for margin trading.
-The margin trading account needs to be activated by transferring from exchange/spot balance. - There are designated cryptocurrencies which cumulatively make up the margin account balance. For exchanges like Binance and Poloniex, there are numerous cryptocurrencies which can add to the margin. Whereas, BitMEX, Deribit and Bybit exchange offer settlement in Bitcoins only.
- Begin margin trading on the different pairs with the 1-100x leverage available on them. Hence, a deposit of 1 BTC allows a user to bet for up to 100 BTC of their margin.
Only exchanges that allow direct purchase of cryptocurrencies using bank transfers or credit/debit cards usually require KYC. Others usually have a small withdrawal limit up to which non-KYC withdrawals can be made.
Remember higher the leverage, higher will be the risks of liquidation. The traders must understand the risk and the percentage of the margin balance they are willing to risk for every trade.
Liquidations happen when the price moves in the opposite direction of the bet until it consumes a large majority of the margin. The liquidation amount varies between 0.5-20% of the margin account balance on different exchanges.
The primary aspect of consideration for derivatives exchange is funding rate, which the traders pay periodically for holding their contracts. Traders also need to make themselves acquainted with stop loss and limit orders on derivatives exchange which protect them from liquidations. Okex conducts a preliminary test which requires an understanding of the risk and other functionalities of the futures market.
The trading fees on most of these exchanges is as low as 0.075% of the total order value for takers, but makers get paid 0.025% for making trades.
Since 2017, the futures market has primarily led the price of Bitcoin [BTC]. While there has been a steady growth in the spot or actual holdings of BTC, the liquidity on the futures market induces massive short and medium-term volatility in crypto prices. The combined Open Interest (OI) on derivatives exchange is usually around $1.5-$3 billion on a daily basis.
Futures also enabled miners to hedge against price volatility and a lock-in price for their produced BTC. Furthermore, many of these exchanges including CME, Bakkt, Okex, Binance and so on are also offering options contracts.
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