How crypto futures trading works

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In some circumstances, instead of actually buying or selling a cryptocurrency like bitcoin directly, which involves setting up a crypto wallet and navigating through complicated exchanges, futures contracts allow investors to indirectly gain exposure to bitcoin and potentially profit from its price movements.Futures are a type of derivative trading product. These are regulated trading contracts between two parties and involve an agreement to purchase or sell an underlying asset at a fixed price on a certain date. In the case of bitcoin futures, the underlying asset would be bitcoin.How crypto futures trading works

There are three main components to a crypto futures contract.

Expiration date: This refers to the date when the futures contract must be settled. In other words, one party has to buy, and the other has to sell at the pre-agreed price. It’s worth noting, however, that traders can sell on their contracts to other investors before the settlement date if they wish.

Units per contract: This defines how much each contract is worth of the underlying asset and varies from platform to platform. For example, one CME bitcoin futures contract equals 5 bitcoins (denominated in U.S. dollars). One bitcoin futures contract on Deribit, however, equals 10 U.S. dollars worth of bitcoin.

Leverage: To increase the potential gains a trader can make on their futures bet, exchanges allow users to borrow capital to increase their trading size. Again, leverage rates vary greatly between platforms. Kraken allows users to supercharge their trades by up to 50x, whereas FTX reduced its leverage rates from 100x to 20x.

There are also two different ways futures contracts can be settled.

Physically delivered: Meaning upon settlement, the buyer purchases and receives bitcoin.

Cash-settled: Meaning upon settlement, there’s a transfer of cash (usually U.S. dollars) between the buyer and seller.Although a crypto futures contract is supposed to closely track the price of the underlying asset, its value can sometimes vary throughout its maturation (as it edges toward its settlement date). This is usually caused by sudden sharp changes in volatility, which can be brought on by a fundamental catalyst such as Tesla buying up more bitcoin or a major country banning crypto. Supply and demand issues for specific contracts can lead to spreads widening or shrinking in one or more set of futures contracts compared to others.Other changes in price include what’s known as “gaps.” These refer to periods of time on price charts where no trading is taking place – so there's no pricing data for those time gaps. They are only present on traditional platforms like CME because they have specific trading hours, unlike the wider crypto market that trades 24/7.

If a cryptocurrency’s price jumps significantly during the traditional market closing hours, large gaps can appear in the asset’s price chart on a traditional platform when the market reopens the following day.