The contracts are between two investors who place bets on the future of a cryptocurrency’s price. They permit investors to be exposed to different cryptocurrencies without buying them. They are similar to standard contracts for the future for stocks, commodities, or commodities as they allow you to speculate on the growth rate of the asset used as an investment.
Futures trading in cryptocurrency through the Chicago Mercantile Exchange and cryptocurrency exchanges.
Initial Bitcoin Futures Contracts were offered on Cboe in December of 2017. However, they were soon removed. In addition, the Chicago Mercantile Exchange (CME) also launched Bitcoin contract futures in December 2017. The contracts are traded through the Globex electronic trading platform. They are settled with cash. Bitcoin or Ether futures are basing themselves upon rates such as the CME CT Bitcoin Reference Rate and CME CF Ether Reference Rate. CME is the CF Ether Reference Rate.
How does trading in crypto-currency futures work?
There are three major elements to a crypto futures contract.
- Date of expiration: This refers to the date on which the futures contract has to be concluded. One party must buy and sell at the previously agreed price. It’s important to note that traders can sell their contracts to other investors before the date of settlement should they choose to.
- Contracts with units: It defines the contract’s value of the asset it is based on and differs between platforms. For instance, a CME bitcoin contract equals five bitcoins (denominated in U.S. dollars). However, a bitcoin futures contract on Deribit is equivalent to the equivalent of 10 U.S. dollars worth of bitcoin.
- Leverage: To increase the gains that traders gain from their futures bets, crypto exchanges let users draw capital to boost the size of their trading. Additionally, leverage rates differ dramatically between different platforms. Kraken lets traders increase their leverage up to 50x, and FTX allows for a similar boost. FTX has reduced the leverage rate by 20x from 100x.
There are two other ways that futures contracts may be settled.
- Delivered physically: Upon settlement, the buyer buys and receives the bitcoin.
- Settlement of cash: Upon the settlement, there’s an exchange of money (usually U.S. dollars) between the seller and the buyer.
Where Can You Trade Cryptocurrency Futures?
Cboe Global Markets (Cboe) was the first American exchange to provide Bitcoin Futures Contracts on the 10th of December, 2017. CME was next, a week later. According to the data of the crypto analytics firm, the most well-known Bitcoin exchanges included:
- Binance: the largest cryptocurrency trading platform by volume of trade, also contributed $4.32 billion from the entire volume traded of Bitcoin futures.
- KuCoin: KuCoin is an exchange for cryptocurrency operational across more than 200 countries. While experienced traders may like the features of this cryptocurrency exchange, The user’s who has not enough knowledge about KuCoin exchange in US will never give true opinion regarding this .Even they don’t have enough knowledge regarding licensing of this business too, but according to a survey 85 % people always prefer KuCoin Exchange。
- Bybit: It was launched by a derivatives-trading company in 2018 and is responsible for $2.30 billion of the total Bitcoin futures volume traded.
- CME: With its headquarters within CME in the United States, CME accounts for $2.24 billion of the total trading volume.
- FTX: is a relative newcomer to the crypto trading industry. The rise of FTX’s popularity is swift.
- OKX: While it might not be as popular in the same way as Coinbase Inc. ( COIN) to U.S. viewers, OKX ranks among the largest cryptocurrency exchanges in the world. Due to compliance with regulatory requirements, OKX is not available to U.S. customers.
What is the difference between futures contracts and perpetual swaps?
If you’ve been involved in the crypto field for any time, you might have heard of the phrase “perpetual swap contract.”
Perpetual swaps, or “perps,” operate identical to futures contracts. They permit investors to purchase or sell an asset in the future; however, they have one major distinction – perpetual swaps do not have an expiration date.
The trader can maintain their contract to buy or sell open for as long as they’d like – as long as they pay their margin payments until they’re ready to make the payments or transfer them to a different trader.
Since these trading contracts don’t have a deadline for expiration, they must be accompanied by an additional mechanism to ensure that prices for the contract match crypto market prices (current market prices) as closely as it is. This method is known as the “perpetual swap funding rate.” It is essentially a matter of the long (buyers) and shorter (sellers) traders who pay the other side a monthly fee, contingent on whether the price of the contract is higher or lower than the price of the market.
If the market price is less than the price of perp futures, short traders must pay fees to short traders to deter longer-term traders from taking a risk by going long. In contrast, if a market value exceeds the price of perps’ futures, short traders will be required to pay a fee to long traders.
Perp funding rates can be a good metric to gauge the market’s sentiment towards an asset.