What Are Bitcoin Futures? How Do They Work? (2024)

Bitcoin (BTC) has experienced a meteoric rise in popularity over the past decade. Yet many investors remain skeptical of the cryptocurrency market because of its decentralized nature, questionable security, unclear regulation and extreme volatility.

Despite these downsides, Bitcoin took a major step toward legitimacy in October 2017 when CME Group, the world’s leading derivatives marketplace, launched trading of Bitcoin futures contracts.

Four years later, ProShares made history again by launching a Bitcoin ETF based on futures contracts, the first ever crypto exchange-traded fund to gain regulatory approval to trade on a major U.S. market.

Bitcoin futures offer investors a unique way to speculate in the crypto market and hedge their crypto holdings. But before you dip your toes into crypto futures, we’ll help you understand how they work and the risks involved.

What Are Bitcoin Futures?

Futures are a type of derivative contract that obligate two parties to exchange an asset—or a cash equivalent—at a predetermined price on a future date.

When investors buy and sell Bitcoin futures contracts, they are speculating about BTC’s future price. In essence, two parties make a bet: One believes the BTC will go up in price in the future, and another bets BTC will fall in price. The person who gets it wrong pays the other party a cash settlement.

There are various futures contracts, for currencies, stock indexes and commodities. The Commodity Futures Trading Commission (CTFC) regulates the overall futures market, and the agency considers Bitcoin a commodity, so Bitcoin futures are commodity futures.

Bitcoin futures contracts trade on the Chicago Mercantile Exchange (CME), which introduces new monthly contracts for cash settlement.

The CME offers monthly BTC futures contracts for six months and additional quarterly contracts for each of the four upcoming quarters. CME Group also offers an additional December contract if only one is listed.

Each futures contract represents 5 BTC. Monthly futures contracts expire on the last Friday of each month.

Front-Month Bitcoin Futures

Bitcoin’s short-term futures contracts are the contracts with the nearest expiration date. They’re also called front-month futures contracts.

Front-month futures contracts typically trade closest to the spot price of Bitcoin, and they can trade either above or below the spot price, depending on whether the market believes Bitcoin prices are headed higher or lower in the near term.

The price of Bitcoin traded on crypto exchanges is considered to be the BTC spot price.

Front-month futures contracts typically trade higher than the current spot price, a condition known as contango. Contango represents market expectations that asset prices are headed higher in the near term.

Meanwhile, backwardation indicates that the market expects asset prices to trade lower soon.

How To Trade Bitcoin Futures

Because each Bitcoin futures contract represents 5 BTC, there is inherent leverage in the Bitcoin futures market.

Bitcoin futures traders often use that leverage to speculate on short-term swings in the market in an attempt to generate large returns on relatively small upfront investments.

At the same time, futures contracts can also be an effective way to mitigate risk. An investor with a large Bitcoin investment can sell a small number of Bitcoin futures contracts to take out an insurance policy against a crash in the Bitcoin market.

Bobby Ong, chief investment officer and co-founder of CoinGecko, says Bitcoin futures can be useful for both short- and long-term investors.

“Due to the volatile nature of Bitcoin and cryptocurrencies in general, short-term traders may use Bitcoin futures to catch outsized gains during short spurts of increased volatility,” Ong says.

Long-term investors may also benefit from using Bitcoin futures contracts for speculative purposes or hedging.

Bitcoin ETFs and Futures

The Securities and Exchange Commission (SEC) and other regulators have been extremely cautious in their approach to Bitcoin and other cryptocurrencies.

The SEC has yet to approve a Bitcoin spot ETF that invests in the cryptocurrency directly for listing on a major U.S. exchange.

Nevertheless, the SEC made history in 2021 when it approved the first Bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), to trade on the New York Stock Exchange.

Instead of investing in Bitcoin directly, the BITO fund and other Bitcoin futures ETFs invest in a diversified basket of Bitcoin futures contracts.

Erik Anderson, senior digital assets research analyst at Global X ETFs, says crypto futures ETFs have a few advantages.

“U.S.-listed Bitcoin future ETFs provide investors with regulatory protections that do not exist on crypto-native exchanges and bring advantages of direct integration within traditional brokerage accounts, such as used in tax-loss harvesting,” Anderson says.

Are Bitcoin Futures a Good Investment?

Much like the cryptocurrency market itself, there are several pros and cons for investors when it comes to Bitcoin futures. Futures contracts can provide investors with flexibility, leverage and the potential to mitigate risk via hedging.

But leverage can be a double-edged sword for investors, and futures trading losses can add up quickly if the market takes a bad turn.

In addition, Bitcoin futures traders are subject to margin calls that can trigger forced liquidation of their positions at the worst possible time if they cannot maintain minimum margin requirements in their accounts. Bitcoin futures traders are also subject to exchange fees, which can affect trading profits.

Ryan Cullen, CEO of Cullen Cioffi Capital Management, says Bitcoin futures can be a useful tool for crypto traders. Still, it is critical that traders fully understand and manage the risks involved.

“Because Bitcoin is fairly volatile, and futures give you the ability to take on a larger position, you can take advantage of short-term swings within the market,” he says.

But he warns investors that the Bitcoin futures market is highly speculative. “Futures allow you to take on a tremendous amount of leverage which means you can end up with an oversized position that ends up being worth very little or nothing.”