Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

Trading with Bitcoin Futures on US Stock Market

Author: Martin Moni
Martin Moni
All publications of the author

2017 was a great year for cryptocurrencies in many ways. Investors saw their coin value skyrocket in triple and quadruple digits, BTC and other cryptocurrencies were legalized in some countries and BTC futures were introduced in the US. The acceptance of BTC futures on major platforms in the US was a huge boost to the industry that had been receiving a lot of criticism from institutional investors. Some like Jamie Dimon, CEO of JPMorgan Chase, went as far as calling it a scam and that he would fire any of his employees found trading the coin. Fast forward two years from then and the company is planning to launch their own digital currency, JPM coin. Talk about eating your own hat.

Today, the Chicago Mercantile Platform (CME) reports receiving an average of $515 million in notional value for BTC futures agreements. Considering that there are even more platforms providing BTC futures in addition to the CME, the total daily traded volume is probably upwards of $1 billion in notional value. Not only does this show that there is a lot of interest in the futures, but also that there must be institutional interest to drive this amount of volume. Indeed, trading BTC futures in the US has become common, but there is still a lot you need to know about it. To become an expert trader, you would need to have a basic understanding of futures agreements and how they work, how the industry came to be and finally how you can participate in it. (Here is: All you need to know about futures commitments)

What are futures in brief?

Futures agreements have had a very long history dating back to the 16th century. Nevertheless, the first official futures platform started in Chicago in the mid-19th century with the sale of wheat. Prior to the formation of the platform, wheat farmers had to bring their wheat produce to Chicago for sale. Back then, there were no clear guidelines about weighing and grading the wheat, nor were there enough storage facilities. Therefore, the farmers were often at the mercy of the buyers as they had to sell all their produce. As you can imagine, the system was very disorganized, but from the chaos arose some forms of understanding. (Have you ever asked yourself: Should You Invest In CFDs Or Stocks To Make More Money?)

Because the farmers and buyers would always meet in the same location, the two parties began making agreements with each other. A farmer would commit themselves to deliver a particular amount of wheat and the buyer would promise to pay a specific price. This worked in favor of both parties, and soon these agreements became commonplace. With time, it got to a point where a written agreement would be made and this could have even been used as collateral at a bank. The participants would even trade the agreements if they ever felt they could not fulfill their side of the agreement.

It wasn’t long afterward that speculators started to get in on it – hoping to buy low and sell high or vice versa. These speculators were not interested in the actual product but rather only on the price changes. For example, imagine if an agreement was made for a farmer to get paid $1,000 for a certain amount of wheat. At the time of the agreement, the deal seems fair because the weather is expected to be great, but after a few weeks, bad weather causes a delay in the planting season. Fearing low supply of wheat at harvest, the holder of the agreement sells it off at $1,000 but now the agreement worth much more at, say, $1,200. The person who does this is called a speculator because they will end up selling the agreement at $1,200 and make a $200 profit. (These are: The 3 Most Trusted Platform Authorities in The World)

In 1848, this center for a platform of wheat futures agreements would become the Chicago Board of Trade (CBoT), one of the earliest futures platforms. The Chicago Mercantile Platform (CME) would later be formed in the late 19th century as would other futures platforms around the US such as the New York Mercantile Platform (NYMEX) and across the world.

The futures arena in the US would keep growing exponentially over the years such that there was a need to create a regulatory body to govern the trade of futures in the US. In 2017, FIA reported that there were 25 billion agreements around the world for futures and options. Therefore, the Commodities Futures Trading Commission (CFTC) was created in 1974 to specifically oversee this growing arena. (All about: Options trading)

The road to BTC futures

In order for a futures arena to be created for any product, it must first be considered a commodity by the CFTC. In economics, something is considered a commodity if it has full or substantial fungibility. To be fungible means that one part of the product is completely indistinguishable from the rest. For instance, a dollar is a product because one is same as any other and so is gold, wheat (of a specific grade), etc. Fortunately, BTC has fungibility but considering it a commodity by law took some time and effort. (Do you know: How easy is it to platform Cryptocurrency in the FX arena?)

There is no doubt that the push toward launching BTC futures as we know them today started with the Winklevoss twins. Tyler and Cameron Winklevoss first came into the limelight through their legal battle over Facebook with Mark Zuckerberg that was settled in 2009. When they discovered BTC in 2012, they saw this as another disruptive technology, perhaps even bigger than Facebook. This is why in 2015 they launched Gemini, one of the first crypto platforms to be licensed and regulated.

However, the biggest problem they saw was that BTC was still a wild, wild west arena that wasn’t accessible to Wall Street and other professional investors. To help bridge the gap, they started to push for the creation of a BTC ETF. In an interview with Financial Times, the twins considered BTC to be better than gold. According to them, BTC beat gold in nearly all attributes that make the latter valuable, especially in scarcity. BTC is much more scarce because it has a 21-million-coin limit while gold is virtually infinite once space exploration begins to mine asteroids or until the next gold mine is discovered. (You should: Learn How To Use Position Exchanging In The FX Arena For Profit)

Keep in mind that ETFs are considered as securities and they are regulated by the Securities and Platform Commission (SEC). Earlier in 2017, the SEC rejected a proposal by the Winklevoss twins for a BTC ETF for several reasons. One of the main reasons was that BTC operates in an over-the-counter arena that is unregulated. Because most of the trade volume originates from China and Japan, the SEC was worried about price manipulation. At the same time, the Gemini Platform was also handling under 1% of the total BTC volume and not enough proportion. For these reasons, the SEC is yet to approve any BTC ETF yet. (Do you know these: 5 Tips to Choosing the Ideal Cryptocurrency Platform?)

Despite the SEC’s reluctance to approve a BTC ETF, the CFTC has been much more accepting. Since BTC has the fungibility required for a commodity, the CFTC agreed to consider BTC as a commodity. Nevertheless, the CFTC chair still said that BTC was unlike any other commodity they have considered, and it took a lot of discussions before it could be approved for trade.

The first platform to offer BTC futures was the Chicago Board Options Platform (CBOE) after 4 months of discussions with the CFTC about the details of the commodity. The BTC futures went live on Dec 10, 2017, followed by the Chicago Mercantile Platform (CME) that launched its futures on Dec 18, 2017. Following these pioneers were other platforms such as Nasdaq and Bakkt. Although CBOE was the first to offer the product, trading volume at the platform was dwarfed by that on the CME and CBOE decided to stop offering BTC futures as of March 2019. The last offering of BTC futures expired at the end of June 2019, although the platform did mention that they might consider reintroducing other futures. (Do you know: What is An ICO and How Can I Make Money On It?)

How to trade futures

Ever since BTC futures were first launched in Dec 2017, the instrument has become very popular and several platforms already offer it for trade. To learn how to trade BTC futures, it is important to first understand how the futures agreements are designed and then how to make the best trading decisions. (Do you know: Which Are The Most Influential Cryptocurrency Arenas By Country?)

How BTC futures are designed

The first thing to remember about trading BTC futures is that you won’t be trading any actual BTC. These are just futures agreements as described in the previous example with wheat. Add to that, futures are traded very differently unlike other financial instruments like stocks. On the plus side, you won’t need to download any trading platform as you would normally need with BTC Forex brokers that deal in CFDs. As you are going to see, there is no need for this with BTC futures.

While BTC can be traded 24/7, BTC futures can only be traded in quarterly cycles from March, June, September and Dec and two additional serial months that are closest to March but not in the March quarterly cycle. This means that upon buying a BTC futures agreement on March, this agreement will expire after three months. Trading also does not occur in the weekends but only between 5 PM Sunday and 4 PM Friday CST. A futures agreement expires at 4 PM GMT on the last Friday of the agreement month. (These are: The 3 Most Trusted Platform Authorities in The World)

Pricing is also different because the CME does not offer or hold any actual BTC. Thus, to set a price for the BTC futures the CME uses the BTC Reference Rate (BRR). This rate is calculated by finding an average of the median BTC prices from several major coin exchanges. The exchanges included are Bitstamp, GDAX, Kraken and itBit. This is done in order to avoid price manipulation that may occur if the median price is taken from a smaller outlier exchange. As a comparison, Cboe was only using BTC prices from the Gemini exchange and this was prone to vary prices. (Now: Coin Ads Banned From Google And Social Media)

Exchanging in BTC futures also requires quite a huge maintenance margin of 35% the value of the agreement. Add to that, a single agreement unit is 5 BTCs, which means you would need about $17,000 to purchase one BTC futures agreement from CME at the current price of $9,634 on live BTC price charts. This is a very high margin since a regular futures agreement on the S&P 500 is just 5%. The high margin is because of the volatility of BTC where the exchange would like to insulate itself from any losses should the trader renege on the agreement. Fluctuation prices are also significantly higher from those of low-spread Forex brokers. Here, minimum fluctuations are $25 for every agreement and $5 for calendar spreads. Now you can see why the exchanges need such a high margin.

What you need to know while exchanging BTC futures

When exchanging any financial instrument, it is important to take note of the factors that affect that instrument. For instance, a commodities trader must take note of climate changes and geo-political shifts to estimate price changes in the commodities they trade. When it comes to BTC futures, among the most significant factors are regulation, technological developments and most recently the expiration of the BTC futures themselves. (Does BTC Stand A Chance Of Becoming The Worldwide currency?)

Regulation has and always will be a major influencer on the price of BTC and other cryptocurrencies. The crypto industry is relatively new and even the most enthusiastic users are always cautious about the future of the industry. For this reason, they always keep an eye out for any red flags, and there are no bigger red flags than regulatory pressure. Some of the notable cases of investor panic can be noticed when the Chinese government completely banned crypto exchanging, the South Korean government almost did, Japan legalized coins and when the US introduced BTC futures. All these represented pivotal moments for cryptocurrencies and the investors responded in kind – pushing prices higher following good news and vice versa.

Meanwhile, technological developments, particularly within the crypto industry, cause shifts in the individual coins. This can be illustrated by the several forks that occurred on the BTC blockchain such as that on August 1, 2017, that led to the creation of BTC Cash (BCH). Following this fork, BTC prices rose rapidly because investors sold their newly acquired BCH for BTC. Every time such a change occurs on the blockchain, such as when the community disagrees on a proposed update, the price of BTC changes too. These changes to the actual technology in BTC also chance investors’ perspective and prices change accordingly. (Revealing FX Bonuses Of Brokers: How To Identify A Real Bonus)

Introduction of BTC futures has added a new dimension to the price of BTC now that so much money is invested in it. This is most notably seen around the time BTC futures agreements are about to expire. Some experts like Josh Olszewicz have even attributed the bear trend that started after the Dec 2017 surge in BTC prices to the expiration of BTC futures agreements. Even though this observation is not completely accurate, a marked increase in volatility toward the expiration of these agreements is undeniable. (Why FX Exchanging Should Not Be Treated Like A Casino)

How profitable is exchanging BTC futures?

A natural question to ask yourself after reading all this is whether it is a worthwhile venture to get into. Well, the market wouldn’t be as big as it is if it wasn’t, would it? But as we have discussed, this market is inaccessible to traders without huge capital because of the high margin requirements. When compared to exchanging BTC CFDs, futures are much more expensive. That being said, there are certain benefits that come with BTC futures that even top CFD brokers can’t beat.


How about ending this with some fun, huh?

Was the article useful for you?
5 (1)

Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.
If you like this discussion on TopBrokers.com then please like us on Facebook