What are crypto futures?

Crypto are contracts that track the value of specific cryptocurrencies. These contracts are based on the value of the underlying digital assets. Investors use crypto futures to speculate on the future direction of Bitcoin and Ether or to hedge against price fluctuations in the crypto markets.

These futures are standardized and traded on exchanges like the Chicago Mercantile Exchange (CME). Like other futures contracts, crypto futures have standardized terms, including expiration dates and contract sizes. When trading crypto futures, you're not purchasing the actual Bitcoin or Ether but speculating on whether prices will rise or fall.

When their forecasts are accurate, traders can potentially profit from both upward and downward price movements by going long or short the contract. On the other hand, if their expectations are wrong, they risk losing money. For example, if a trader goes long Bitcoin futures because they expect prices to move higher, they’ll likely lose on the trade if prices fall instead.

Crypto futures are also popular among businesses and institutional investors looking to hedge against price volatility in the cryptocurrency market. For example, companies with exposure to crypto assets may use Bitcoin futures to lock in prices and protect against potential drops in value. Timing, position sizing, and costs are crucial considerations when using crypto futures as part of a hedging strategy.

Additionally, Bitcoin and Ether futures can act as a hedge against broader market movements and currency risk. With cryptocurrencies often viewed as alternative assets, some investors use them to diversify their portfolios or protect against market downturns. Since Bitcoin and Ether are traded globally and often seen as stores of value, these futures may help offset losses from traditional asset classes or currency fluctuations.

While crypto futures offer opportunities for hedging and speculation, they also come with substantial risks. Given the high volatility of cryptocurrencies, sudden price swings can lead to significant losses, especially when trading leveraged investments like futures, which may amplify both gains and losses.

Example

Among the various types of cryptocurrency futures contracts, CME Group Bitcoin futures (/BTC) are some of the most actively traded, known for their standardization, global acceptance, and liquidity. Each /BTC contract represents 5 Bitcoin. For example, if Bitcoin is trading at $40,000 per coin, the value of one /BTC contract would be $200,000 (5 x $40,000). Bitcoin futures have monthly expirations.

To buy or sell a /BTC contract, traders must put down a percentage of the total contract value, known as the margin requirement. Margin requirements can vary based on market volatility but typically represent a small fraction of the contract’s total value (e.g., $30,000). The futures trade in $5 increments, so the smallest price movement (or tick size) equals $25 (5 Bitcoin x $5). Trading occurs on CME Group's Globex platform from Sunday to Friday, 5:00 p.m. to 4:00 p.m. CT, with a one-hour break at 4:00 p.m. daily.

Crypto futures can be used for both hedging and speculation. Businesses and investors use them to hedge against price volatility in the cryptocurrency markets, while traders often use these contracts to speculate on price movements in assets like Bitcoin and Ether.

• Speculating: Traders speculate on the future direction of cryptocurrency prices by buying futures if they expect prices to rise and selling futures if they anticipate a decline. This allows them to potentially profit from the high volatility in cryptocurrencies, which can be driven by factors such as market sentiment, regulatory developments, and macroeconomic conditions. The flip side is that traders can lose money when speculating when their forecasts are incorrect.
• Hedging: Companies and institutional investors exposed to cryptocurrencies often use crypto futures to mitigate the risk of price fluctuations. For example, a company holding Bitcoin may sell Bitcoin futures to lock in a specific price and protect against potential declines. Conversely, businesses looking to secure cryptocurrency at current prices may buy futures to hedge against potential price increases.

Bear in mind that, despite their potential for both hedging and speculation, trading crypto futures can be risky due to the unpredictable nature of cryptocurrency prices. Additionally, if a market moves sharply against a position, traders may face substantial losses due to the leverage involved with futures trading.

The CME Group offers standard crypto futures on key assets like Bitcoin and Ether. These contracts are highly liquid, making it easier for traders to enter and exit positions. Like other futures, standard crypto contracts provide leverage, allowing traders to control large positions with relatively little capital. However, this leverage can magnify both potential gains and losses due to the high volatility in cryptocurrency markets.

The CME Group also offers micro crypto futures, which are smaller versions of the standard contracts. These micro contracts are more accessible for traders with lower risk tolerance or those looking to trade smaller positions. Micro crypto futures allow for more precise risk management, enabling traders to adjust their exposure more carefully, and provide a lower-risk way for new traders to gain experience in crypto futures without committing large amounts of capital.

The CME Group offers standard Bitcoin futures (/BTC), providing a way for traders and institutional investors to gain exposure to Bitcoin’s price movements. These contracts are highly liquid, making it easier for traders to enter and exit positions. Bitcoin futures are sized at 5 Bitcoin. For example, if Bitcoin is priced at $40,000, the value of 1 /BTC contract would be $200,000 (5 x $40,000). The minimum price fluctuation, or tick size, for Bitcoin futures is $5 per Bitcoin which equates to $25 per contract (5 x $5). Bitcoin futures trade nearly 24 hours a day, Sunday through Friday, providing flexibility for traders to react to global market events. Bitcoin futures have monthly expirations.

The CME Group also offers Micro Bitcoin futures (/MBT), which are smaller versions of the standard /BTC futures at 1/50th the size. These micro contracts are more accessible for traders with lower risk tolerance or those looking to trade smaller positions. Micro Bitcoin futures are sized at 0.10 Bitcoin. For example, if Bitcoin is priced at $40,000, the value of 1 /MBT contract would be $4,000 (0.1 x $40,000). The minimum price fluctuation, or tick size, /MBT futures is $5 per Bitcoin which equates to $0.50 per contract (0.10 x $5). Like the larger Bitcoin futures, Micro Bitcoin futures trade nearly 24 hours a day, Sunday through Friday, providing flexibility for traders to react to global market events. Micro bitcoin futures also have monthly expirations.

Additionally, CME Group offers Bitcoin Friday Futures (/BFF), which are even smaller than the standard Bitcoin futures and Micro Bitcoin futures. Bitcoin Friday futures allow for more precise risk management, enabling traders to adjust their exposure more granularly. They also provide a lower-risk option for new traders to gain experience in Bitcoin futures without committing significant capital. Bitcoin Friday futures are sized at 0.02 Bitcoin. For example, if Bitcoin is priced at $40,000, the value of 1 Bitcoin Friday futures contract would be $800 (0.02 x $40,000). The minimum price fluctuation, or tick size, for Bitcoin Friday futures is $5 per Bitcoin which equates to $0.10 per contract (0.02 x $5). Like the larger Bitcoin futures and Micro Bitcoin futures, Bitcoin Friday futures trade nearly 24 hours a day, Sunday through Friday, providing flexibility for traders to react to global market events.

The CME Group offers standard Ether futures (/ETH), allowing traders and institutional investors to gain exposure to Ether’s price movements. These contracts are highly liquid, enabling easier entry and exit of positions. Ether futures are sized at 50 Ether. For example, if Ether is priced at $2,000, the value of 1 /ETH contract would be $100,000 (50 x $2,000). The minimum price fluctuation, or tick size, for /ETH futures is $0.50 per Ether which equates to $25 per contract (50 x $0.50). Ether futures trade nearly 24 hours a day, Sunday through Friday, providing flexibility for traders to react to global market events. Ether futures have monthly expirations.

The CME Group also offers Micro Ether futures (/MET), which are smaller versions of the standard /ETH futures at 1/500th the size. These micro contracts are ideal for traders with lower risk tolerance or those looking to trade smaller positions. Micro Ether futures are sized at 0.1 Ether. For example, if Ether is priced at $2,000, the value of 1 /MET contract would be $200 (0.1 x $2,000). The minimum price fluctuation, or tick size, for Micro Ether futures is $0.50 per Ether which equates to $0.05 per contract (0.10 x $0.50). Like the larger /ETH futures, /MET futures trade nearly 24 hours a day, Sunday through Friday, providing flexibility for traders to react to global market events. Micro Ether futures also have monthly expirations. Micro Ether futures offer more precise risk management, allowing traders to fine-tune their exposure. They also provide a lower-risk option for new traders to gain experience in trading Ether futures without committing large amounts of capital.

Crypto futures, including Bitcoin and Ether, are essential tools for managing risk and speculating in the rapidly evolving cryptocurrency markets. These standardized contracts allow participants to lock in prices for the future, offering stability for businesses with exposure to cryptocurrencies and providing potential opportunities for traders. Cryptocurrencies like Bitcoin are also increasingly viewed as alternative assets, making crypto futures popular for hedging against inflation, currency devaluation, and market volatility. By ensuring liquidity and transparency, crypto futures attract a wide range of participants, from institutional investors and tech companies to individual traders.

Prior to trading virtual currency Futures products, please review the NFA Investor Advisory & CFTC Advisory providing more information on these potentially significant risks.