Cryptocurrency Futures Defined and How They Work on Exchanges

Cryptocurrency futures are contracts between two investors who bet on a cryptocurrency's future price, giving them exposure to cryptocurrencies without purchasing them. Crypto futures resemble standard futures contracts because they allow you to bet on the price trajectory of an underlying asset. These contracts trade on the Chicago Mercantile Exchange (CME) and cryptocurrency exchanges. Keep reading to learn more about crypto futures, how they work, and the benefits of trading them.

What Are Cryptocurrency Futures?

Futures contracts of any underlying asset are derivatives of that asset. These contracts are bought and sold between two investors who speculate about that asset's price at a specific date in the future. These contracts have a specific number of units, pricing, marginal requirements, and settlement methods that you must meet.

The table below highlights the contract details for Bitcoin and ETH futures offered by the CME:

Below are the contract details for Bitcoin futures offered by CME:

Trading on Regulated vs. Unregulated Exchanges

Regulated Exchanges

Consider the following example for a CME Group Bitcoin futures contract. Suppose an investor purchases two Bitcoin futures contracts totaling 10 bitcoin. The price of a single bitcoin when the futures contract was purchased was $5,000 each, totaling $50,000 for both futures contracts.

The margin requirement for Bitcoin futures trading at CME is 50% of the contract amount, meaning you must deposit $25,000 as margin. You can finance the rest of the contract purchase by using leverage.

The contract's value varies based on the underlying asset's price (i.e., Bitcoin). CME uses the Bitcoin Reference Rate, which is the volume-weighted average price for Bitcoin sourced from multiple exchanges and is calculated daily between 3 p.m. and 4 p.m. London time.

Depending on Bitcoin’s price fluctuations, you can either hold onto the futures contracts or sell them to another party. At the end of your contracts’ duration, you have the option to roll them over to new ones or let them expire and collect the cash settlement due.

The steps to conduct trade in Bitcoin futures are the same as those for a regular futures contract. You begin by setting up an account with the brokerage or exchange where you plan to trade. Once your account is approved, you will need another approval from the trading service provider to start futures trading. Generally, the latter approval is a function of funding requirements and the account holder’s experience with derivatives trading. 

The same criteria also play an essential role in determining leverage and margin amounts for your trade. Futures trading makes heavy use of leverage to execute trades. Government agencies regulate the maximum leverage amount allowed at regulated exchanges and trading venues.

Unregulated Exchanges

The story is a different one at unregulated exchanges. They have the freedom to allow excessive risk-taking for their trades. For example, Binance offered leverage of up to 125 times the trading amount when it launched futures trading on its platform in 2019. That figure was revised to 20 times the trading amount in July 2021.

Remember that higher leverage amounts translate to more volatility for your trade. Thus, the promise of high profits is offset by the risk of losing significant amounts of money.

The amount you can trade depends on the margin amount available to you. Margin is the minimum collateral you must have in your account to execute trades. The higher the amount of the trade, the greater the margin amount required by the broker or exchange to complete the trade.

The exchange calls for a 50% margin for Bitcoin and 60% for Ether futures trading. Brokerages offer futures products from many companies but can have different margin requirements over and above the amount the provider charges.

For example, CME has a base margin requirement for Bitcoin futures; brokerages like TD Ameritrade, which offers CME Bitcoin futures trading as part of their product suite, can set margin rates on top of the base rate set by the exchange.

Popular Exchanges for Cryptocurrency Futures

According to data from crypto datamining site CoinGecko, the most prominent crypto derivative trading platforms on Jan. 19, 2024, were:

• Binance: The world’s biggest cryptocurrency exchange by trading volume also accounted for $29.44 billion of the total trading volume in Bitcoin perpetuals and futures.  
• Deepcoin: An innovative exchange that first joined the top three of this CoinGecko list in 2023. It had a trading volume of $2.56 billion on Jan. 19, 2024.
• ByBit: While it may not be as well-known as Binance to U.S. audiences, ByBit ranks among the world’s biggest cryptocurrency exchanges. It had a trading volume of $2.75 billion on Jan. 19, 2024. Due to regulatory compliance reasons, ByBit is not available to U.S. customers.
• OKX: OKX offers 424 trading pairs in perpetuals and futures. Trading volume was $10.11 billion on Jan. 19, 2024.
• Bitget: Also established as a derivatives exchange initially, Bitget features 215 cryptocurrency pairs for trade, including perpetuals and futures. Trading volume on Jan. 19, 2024, was $8.43 billion.
  

Benefits of Cryptocurrency Futures Trading

The main advantage of trading Bitcoin futures contracts is that they offer regulated exposure to cryptocurrencies. That is a significant point in a volatile ecosystem with wild price swings. Bitcoin futures contracts at CME are regulated by the Commodity Futures Trading Commission (CFTC).

This offers a measure of confidence and recourse to institutional investors, who compose the majority of traders in such contracts.

• Simplicity: Bitcoin futures also simplify the process of investing in Bitcoin. You do not need to create a Bitcoin wallet or put money into custody solutions for storage and security while trading because there is no Bitcoin exchange. An added benefit of cash-settled contracts is eliminating the risk of physical ownership of a volatile asset.
  
• Safer Than Owning Crypto: Bitcoin futures contracts are relatively safer for dabbling in Bitcoin without getting burnt because futures contracts have positions and price limits that enable you to curtail your risk exposure to the asset class.
  
• Position Limits: Position limits differ between exchanges. For example, CME allows a maximum of 4,000 front-month futures contracts for Bitcoin and Micro Bitcoin and 8,000 for Ether and Micro Ether. Binance, the world’s biggest cryptocurrency exchange by trading volume, has a position limit adjustment feature that enables manual reconfiguration of limits based on past trading history and margin amounts.

What to Consider When Trading Cryptocurrency Futures

The number of venues offering cryptocurrency futures trading is growing, as are the numbers of participants and trading volumes compared to other commodities. Cryptocurrency futures trading has its own set of peculiarities.

Trading Volume

Trading volumes in cryptocurrency futures can mimic those of its spot markets counterpart. Price fluctuations can also be high, especially during volatile stretches regarding price. During these times, cryptocurrency futures may appear to follow spot market prices or trade at a significant premium or discount to spot prices.

This means that Bitcoin futures may not offer sufficient protection against the volatility of the underlying futures market. The SEC warned investors about the pitfalls of trading cryptocurrency futures in June 2021. "Among other things, investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment." 

Most Exchanges Are Unregulated

Except for select trading venues, such as CME, cryptocurrency futures trading occurs mainly on exchanges outside the purview of regulation. Among the world’s biggest platforms for Bitcoin futures, only CME is regulated by the CFTC. Binance has opened U.S. subsidiaries only recently, but its U.S. offerings are limited.

Cryptocurrency Futures Options

Cryptocurrency options are a relatively new development. CME introduced trading in Bitcoin options in January 2020 and Ether futures options in September 2022.  

Cryptocurrency options work like standard options contracts because they are a right, not an obligation, to buy cryptocurrency at a set price on a future date. The asset is represented by cryptocurrency futures contracts traded at the CME, with a single options contract equivalent to a single futures contract consisting of 5 BTC or 50 ETH. Options contracts for six consecutive months are available at a time at CME. They expire monthly on set dates, with two additional December contract months.

Traders can buy call options if they think the price of Bitcoin will go up. Alternatively, a put option is a bearish bet that the cryptocurrency’s price will decline. The gains and losses in both cases are different. In a call option, gains may be unlimited (because the price can go up indefinitely), while the losses are limited to the premium paid for the contract. In a put option, losses may be unlimited (because the price may go down to zero), while the gains are limited to the premium paid for the options contract. 

Bitcoin’s price volatility makes it a risky asset for options trading. The implied volatility of options contracts is high, meaning that the price of a single Bitcoin option is also high. High prices can magnify trader losses.

The Bottom Line

Cryptocurrency futures are contracts based on underlying cryptocurrency prices that allow traders access to price fluctuations without taking possession of cryptocurrencies. These futures reduce the risk of buying actual cryptocurrency because you're buying and selling bets on what you believe their prices are going to do.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.