Cryptocurrency futures: A new way to ride the crypto wave, with some old-school trading twists

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Ready for launch? If you’re crypto curious, be cautious too.

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Crypto traders might consider themselves light-years removed from their boisterous, brawling ancestors who bought and sold futures contracts on old-school commodities like crude oil, gold, and soybeans in the trading pits of yore. But nowadays, they actually share a common strand of DNA, in the form of futures contracts based on Bitcoin (BTC), Ether (ETH), and other digital currencies.

These new futures, which have seen explosive growth since their introduction just a few years ago, can offer crypto exposure without holding the actual digital currency. They share similarities with traditional futures contracts, but there are some key differences.

Futures contracts are agreements to buy or sell a predetermined amount of a commodity or financial product on a specified date. Unlike an actual crypto token or coin, a crypto futures contract has a fixed lifetime, meaning it will expire, or “go off the board,” at some point. A futures contract comes with a list of specifications, or “specs,” that both sides of the trade must understand and uphold, including:

The first crypto futures were launched around 2017. Crypto futures trade on digital or electronic exchanges, many of which also serve as “spot” crypto exchanges. There are at least a dozen crypto futures exchanges; some of the biggest names include Binance, BitMEX, Bybit, Coinbase, Kraken, and Uniswap. Crypto exchanges can also be centralized or decentralized, and it’s important to know the advantages and disadvantages of each structure.

Chicago-based CME Group (CME) also lists crypto futures, along with an array of commodities and financial contracts. Unlike its digital-native counterparts, CME’s roots go back more than a century to its beginnings as a commodities exchange trading butter, eggs, and other agricultural products. CME has long since evolved into a mostly-electronic exchange and ranks as among the top exchanges for crypto futures trading.

As of mid-December 2024, CME was the top exchange in terms of the value of open positions (“open interest”) for Bitcoin-based futures, at over $20 billion (according to CoinGlass, a cryptocurrency data analysis platform). Binance was second at $12.8 billion, although it ranks first in daily trading volume.

As prices for Bitcoin and other digital currencies soared over the past few years, crypto futures trading surged. Part of that growth likely reflects the fact that futures allow exposure to an underlying asset (a “hot” asset, in the case of crypto) without going to the trouble and taking the risk of buying the actual asset.

The fastest-growing crypto futures include two Bitcoin-based CME contracts:

As of December 2024, initial margin for one micro Bitcoin futures contract was about $2,450, compared to more than $122,000 for the full-size version. CME also lists Ether futures contracts in both full-size (50 Ether) and micro (0.1 Ether).

Recent CME trading activity indicates investors are gravitating toward smaller bites of the crypto pie. An average of 44,625 CME micro Bitcoin futures contracts changed hands each day during the first 11 months of 2024, a more than fourfold increase from the same period in 2023, according to exchange data. Trading in the standard Bitcoin futures contract averaged 17,835 contracts a day, up 60% from the same period in 2023.

Other smaller-bite Bitcoin futures available include the Coinbase (COIN) “nano” Bitcoin contract, for example, which represents 1/100th of a Bitcoin (roughly $1,000 as of December 2024) and is cash settled every month.

Crypto itself remains largely unregulated, meaning there’s nothing in place to safeguard investors, as the Federal Deposit Insurance Corporation does for U.S. bank customers. Federal agencies that might oversee crypto markets have yet to agree on some fundamental principles. The Securities and Exchange Commission (SEC) wants to classify digital assets as securities; the Commodity Futures Trading Commission (CFTC) views cryptocurrencies as commodities, like oil or gold.

But because the CFTC regulates U.S. futures markets as well as futures exchanges like the CME, there is some semblance of a safety net. Exchanges also have a key role in guaranteeing that futures contracts will be honored, because they also operate clearinghouses, which serve as counterparties in every trade. No such structural protections exist yet for actual crypto.

Many crypto futures contracts are reasonably liquid, meaning a trader can get an order filled and establish or close out a position relatively expediently. Also, because futures contracts can be both bought and sold, they can be applied in different ways to protect or diversify a crypto portfolio or make an outright bullish or bearish bet.

In a simplified example, a Bitcoin owner who’s intent on holding the cryptocurrency for a long time but concerned about a short-term price drop might sell a Bitcoin futures contract short. The idea would be that if the price declines, the contract could be bought back at a profit, potentially offsetting any paper losses in the actual cryptocurrency.

But just as cryptocurrencies carry risks, futures in general hold unique risks of their own. Futures can be subject to heightened volatility that leads to sharp, sudden price swings. And remember: futures trade on margin, which allows a trader to deposit only a fraction of the notional value of the contract to establish a position. But margin requirements for CME crypto futures, for example, are higher than for other financial contracts. In December 2024, the maintenance margin for a micro Bitcoin contract was about $2,452, or about 24% of the contract’s total value. In contrast, the maintenance margin for a micro E-mini S&P 500 index futures contract was $1,484, or about 5% of the contract value.

A word of caution: Margin should be used carefully and judiciously, as it’s a double-edged sword. Small market moves can have an outsize impact—positive or negative—on an account’s profit and loss.

Cryptocurrency futures contracts are growing increasingly popular and can offer additional inroads for investors and traders seeking exposure to the fast-moving crypto market. But like crypto itself, futures carry unique features and present unique risks that should be studied and considered carefully.

The number of crypto futures and exchanges that offer them is expanding, so it’s important to thoroughly research these markets. At the same time, keep a close eye on the regulatory landscape, as it’s evolving rapidly.