Understanding Cryptocurrency Futures: Explaining What They Are, Guidelines for Trading, and Potential Hazards

Crypto futures have experienced a meteoric rise in popularity since they were first introduced a few years ago, enabling market participants to gain exposure to cryptocurrencies without the need to possess the actual coins. While sharing similarities with traditional futures, crypto futures have distinct characteristics to consider.

Getting to Know Futures

Futures contracts are predetermined agreements that set the conditions for buying or selling a given quantity of a commodity or financial product at a future date. A crypto futures contract differs from owning a cryptocurrency in that it has a defined expiration date, or a time when it will no longer be valid. Each futures contract has specifications, often referred to as “specs,” which must be understood and abided by both parties involved, including:

• Contract size: For instance, this could mean 5,000 bushels of soybeans or 100 troy ounces of gold.
• Price quote and smallest price increment: These are generally in U.S. dollars or cents.
• Operating hours: Most futures markets are accessible via electronic platforms around the clock, with some also offering daytime floor trading. They may rest briefly each day for maintenance and typically pause over weekends.
• Expiration and delivery dates: Exchanges set a contract’s final trading day and the date it will be rendered invalid.
• Settlement type and process: Financial futures can be cash settled against a reference price at the end of the last trading day, while other futures require physical delivery by the seller and acceptance by the buyer of the underlying asset.

Crypto Futures Trading Venues

Introduced around 2017, crypto futures are primarily traded on electronic platforms, some of which also offer spot crypto trading. Among the major platforms are Binance, BitMEX, Bybit, Coinbase, Kraken, and Uniswap. Crypto exchanges can range from centralized to decentralized, each with specific benefits and drawbacks.

The Chicago-based CME Group (CME), a long-standing exchange known for a variety of commodities and financial contracts, also lists crypto futures. Although it started over a century ago dealing with agricultural products, CME has transformed into an electronic exchange and is a leading platform for crypto futures trading.

By mid-December 2024, CME led the way in Bitcoin-based futures open interest, exceeding $20 billion, according to CoinGlass. In contrast, Binance came in second with $12.8 billion in open interest but surpassed others in daily trading volume.

The Surge in Crypto Futures

Crypto futures trading volumes have soared in tandem with the rising prices of Bitcoin and other cryptocurrencies. This growth is partly attributed to futures’ ability to offer exposure to crypto assets without the associated risks of direct ownership.

Amongst the quickly expanding variety of crypto futures are two Bitcoin-based CME contracts:

• Standard contract. The initial, larger contract size is five Bitcoin.
• Micro contract. Part of CME’s “micro” futures series, this smaller contract represents 0.1 Bitcoin and offers a more affordable trading option for retail traders.

As of December 2024, initial margin requirements for a CME micro Bitcoin futures contract stood at approximately $2,450, drastically lower than the over $122,000 needed for the standard contract. Additionally, CME provides both full-size and micro Ether futures contracts.

CME’s Micro Bitcoin and Ether Futures

Market data from CME demonstrates a growing preference for smaller contract sizes. For instance, daily trading for CME’s micro Bitcoin futures surged in the first 11 months of 2024, a significant uptick from 2023. Similarly, smaller offerings such as Coinbase’s “nano” Bitcoin contract provide an alternative for market participants.

Exchange Roles and Regulatory Oversight

Despite cryptocurrency’s largely unregulated nature, U.S. futures markets fall under the CFTC’s purview, which includes exchanges like CME. This regulatory oversight offers some investor protection, unlike the crypto market itself. Exchanges guarantee contracts will be honored through the operation of clearinghouses in every trade, providing a level of structural security.

However, the potential for volatility and the use of margin in futures trading introduces financial risks. Traders can leverage a small amount of capital to control a much larger contract value, yet must also meet higher margin requirements than those for other contracts.

A cautionary note: The use of margin amplifies both gains and losses, making it essential to approach with caution and prudence.

Key Takeaways

As popularity grows for crypto futures, these instruments offer alternative routes into the dynamic crypto markets. However, the intrinsic features and risks of futures demand thorough research and consideration.

With a growing array of crypto futures and trading platforms, it’s crucial to conduct careful research. Furthermore, it’s wise to stay informed on the evolving regulatory ecosystem around cryptocurrencies.