How To Trade CME Bitcoin Futures?
Popularly referred to as “The biggest financial exchange you have never heard of” by the finance world, the Chicago Mercantile Exchange, or simply CME, is one of the World’s foremost derivatives marketplaces where producers and investors hedge and speculate futures and options. The CME is a global market place where futures, options, and derivatives are traded on a worldwide platform known as the CME Globex platform.
Economists give the CME such an alias because this multi-billion-dollar exchange has its hands in almost every major trade in the world, and with Bitcoin reaching unprecedented heights in the last few years, this digital commodity wasn’t going to be out of grasp for much longer. Think of the CME as an exchange platform that serves as a global escrow that helps provides cushion for the unexpected.
When the farmer wants to produce tons of crops, he comes to sell his crops at this market place to a willing investor before the day of harvesting to avoid uncertainty over the price of his commodity. This analogy holds for commodities that may fall and rise in price (mostly in great demand) such as crude oil and natural gas, electricity, wood, metal, grain, and so on.
What Are Bitcoin Futures?
Bitcoin futures are contracts that serve as a price ‘hedge.’ The contract exists between two parties, namely, the producers (or miners) and the investors (or users). This contract is a binding agreement between both parties that allows the parties to transact, i.e., buy and sell their bitcoin (even before actually mining) to investors and bitcoin users at an agreed price. This is a risk management tool used to shield both parties against great losses and ultimately providing a stable market for exchange.
Most notably, bitcoin futures, like any other futures contract, involves hedging and speculating. Take, for example, a miner who decides to sell a thousand bitcoin (before mining) to an investor at a particular price to avoid the price of Bitcoin downsizing in the future when it is actually ready to sell.
Meanwhile, the investor buys at the said price, hoping that the price of bitcoin rises the said future for him to make a profit. This works for selling as well as buying.
Even though futures markets have been in existence for decades, it is only recently being explored in the crypto world due to the rising demand and acceptance of bitcoin in the markets. However, bitcoin has been relatively erratic with its wildly fluctuating prices, which cause a scare to investors.
What You Should Know Before Buying And Selling Bitcoin Futures
Before embarking on entering the bitcoin futures market, one must speculate whether the price of bitcoin would appreciate over time, or reduce. It is important to note that holding of Bitcoin is not required, and all value of yields is paid in cash on CME. This means that speculators would not require a bitcoin wallet to speculate unless specified by the broker.
The trading time for Bitcoin is nearly 24 hours. Trading hours include 6 pm to 5 pm ET from Sunday to Friday. Although most trades on futures contracts are in quarterly cycles; match, June, September, and December, Bitcoin futures can be traded during months of the quarterly cycle; known as a serial month. Traders can also get out of positions before the said date to mitigate losses.
The CME margin requirement for Bitcoin is 35%, and contract prices are derived from several exchanges. TheCME exchange also halts contracts if they get up to the 7% or 13% limit, trading will then commence without it stopping again as long as the price is still within the bitcoin price limit for 2 minutes. However, if the price falls back from the limit, the limit will be raised to the next limit; 13% or 20%.
If in the course of trading and the contract price hits the 20% limit, there will be no stop in trading, and trading simply continues within the 20% limit the remaining session.
The central idea of futures contracts is hedging. This is the risk management tool in case of dwindling prices of today’s volatile crypto world. That being said, for several reasons, it would be best not to put all your eggs in one basket, taking into account the margin.
Take, for example, you buy ten bitcoins at a particular price and hoping that it goes up in value to make a profit. If the price of bitcoin falls drastically, that will result in a severe loss, hence defeating the purpose of hedging. Investors are advised not to trade all assets at a go in case price action moves against speculation.
Futures contracts should never be confused or mistaken for investing. The major difference between the two is that futures have an expiry date on the contract. Where investing would generally entail longer periods, futures usually involve holding positions for far shorter periods.
Buying And Selling Bitcoin Futures On CME
Bitcoin trading can be done on the CME group site. All traders must first open an account with a bank or trusted broker regulated in their country that is Futures Commission Merchant (FCM) approved. Contact the broker of your intention to trade bitcoin futures and check the necessary requirements given. This could require further identification and a certain minimum balance.
Your futures commission merchant will help you choose a membership where you select an account type. You can also trade markets directly via the CME Group website. As an individual investor, accessing CME through a broker is most ideal as accessing CME DIRECT requires a large amount of capital.
Once registered, the rest is straightforward. Have a good strategy, and execute your speculations.
To Wrap It Up
Derivatives markets for Bitcoin futures provide stability by reducing traders’ risk on regulated platforms such as the CME. It also provides liquidity due to its huge status as one of the leading exchanges where several traders around the world enter to make transactions also allowing for competitive prices in the market. Most recently, bitcoin futures have seen over $500 million traded per day.