Bitcoin Futures Explained: How They Work and What They Are Used For

Key takeaways

• A bitcoin future is a contract to buy or sell at a price fixed today on a date set in the contract. Most contracts are cash-settled, so no coins change hands.
• Futures use margin: a deposit controls a much larger position. That is leverage, and it magnifies losses as much as gains.
• Miners and funds use futures to hedge, and traders use them to speculate in either direction. Perpetual futures on crypto platforms have no expiry and use a funding rate instead.
• Regulated exchanges and unregulated platforms differ in oversight and recourse. A futures-based fund holds contracts, not coins, so it differs from a spot ETF.
• Leverage can wipe out a deposit quickly, and many beginners lose money. This article explains the instruments and suggests no strategy.

What are bitcoin futures?

A bitcoin futures contract is an agreement to buy or sell bitcoin at a price fixed today, on a date set in the contract. Trading bitcoin for immediate delivery is called the spot market. In a futures contract the two sides agree on the terms now and settle later.

Futures are much older than Bitcoin. The classic example is a wheat farmer and a baker. In spring the farmer fears the price will fall by harvest, and the baker fears it will rise. They agree today on a price for wheat delivered in autumn, so both know where they stand. A bitcoin future works the same way, with bitcoin’s price in place of wheat’s.

Contracts are standardized: each specifies its size, its expiry date and how it settles. Most traders close their position before expiry by taking the opposite side. CME Group, a large US derivatives exchange, launched bitcoin futures in December 2017, and a second US exchange had listed its own contract about a week earlier.

How do cash-settled and physically settled futures differ?

In a cash-settled contract the difference between the contract price and a reference price is paid in dollars, and no bitcoin changes hands. In a physically settled contract the seller delivers actual bitcoin. If you bought a cash-settled contract and the reference price at expiry is above yours, the seller pays you the difference. If it is below, you pay.

The bitcoin futures listed by CME are cash-settled against a published reference rate. That is simpler for exchanges, brokers and funds, because nobody has to hold or move coins.

How do margin and leverage work?

To open a futures position you post margin, a deposit that is only a fraction of the position’s value. That is leverage: a small deposit controls a larger exposure, and profits and losses are calculated on the whole position, not on the deposit.

Here is an illustration with an invented ratio, not any exchange’s actual requirement. Suppose the deposit equals one-tenth of the position’s value. A one-tenth rise in the price doubles the deposit. A one-tenth fall wipes it out. Real requirements differ by venue and product and change, so check them directly.

When losses eat into the deposit, the broker or platform either issues a margin call, asking you to add money, or closes the position automatically, which is called liquidation. In a fast market this can happen within minutes. Many forced closings at once can push the price further, a dynamic described in Why Is Bitcoin So Volatile? The US Commodity Futures Trading Commission (CFTC) has warned that traders in margined futures may lose more than their initial investment.

What are bitcoin futures used for?

Futures are used for hedging, for speculation and for comparing prices.

Hedging. Take a miner who expects to sell newly mined coins in three months. By selling futures now, the miner fixes a price. If the market falls, the gain on the contract offsets the lower value of the coins. If it rises, the loss on the contract offsets the higher value. A hedge trades away possible upside for certainty. Inside a Bitcoin Mining Operation explains how miners earn their income.

Speculation. Traders use futures to bet on a price direction without owning bitcoin. Because a contract can be sold as easily as bought, betting on a fall is as simple as betting on a rise.

Price discovery. Futures prices reflect what traders expect, and people watch them alongside the spot price. Traders also exploit gaps between the two, which tends to keep them linked. How far futures lead the spot market or follow it is debated.

Do futures change Bitcoin itself?

No. A futures contract is a claim about price. It does not create, destroy or move any bitcoin on the blockchain, and it cannot change the rules that nodes enforce. The number of coins in existence follows the issuance schedule in What Is the Bitcoin Halving?, whatever happens in derivatives markets. Whether futures steady or unsettle the price is argued both ways.

What are perpetual futures and the funding rate?

A perpetual future is a contract with no expiry date, offered mainly by crypto trading platforms, which began listing them around 2016. An ordinary future is pulled toward the spot price as expiry nears. A perpetual has no such date, so the platform uses a funding rate instead.

The funding rate is a periodic payment between traders. When the perpetual trades above the spot price, those betting on a rise usually pay those betting on a fall. When it trades below, the payment flows the other way. The money typically goes between traders, not to the platform, and the interval varies by platform.

So a position held for a long time can cost money or earn it, on top of the risks of margin and liquidation. Rules on who may offer or use perpetuals differ by country and change, so check what is allowed where you live.

How do regulated futures differ from unregulated platforms?

On a regulated exchange, a clearinghouse stands between buyers and sellers, margin is collected and adjusted daily, and rules such as position limits apply. In the US, the CFTC oversees futures on regulated exchanges, and the brokers that handle customer orders must be registered. CME cited such risk controls when it listed its contract.

Unregulated platforms offer fewer protections. Some are based abroad and may not be open to customers in your country. If one fails or freezes withdrawals, your balance is only a claim against a company, as the failures of 2022 showed, a risk covered in Is Bitcoin Safe?

The CFTC advises checking that anyone selling you futures or options on virtual currencies is registered. Futures also attract scams: fake platforms, “signal” groups and managed accounts that promise guaranteed returns. Common Bitcoin Scams and How to Spot Them lists the patterns, and Is Bitcoin Regulated in the US? explains which agencies do what.

What is a bitcoin futures ETF, and how is it different from a spot ETF?

A bitcoin futures ETF is a fund that holds futures contracts and no bitcoin. The first US funds of this kind launched in October 2021, and spot ETFs, which hold coins, began trading in January 2024. Bitcoin ETFs: What They Are and What They Mean for Investors covers the spot structure and how to compare funds.

The main difference is rolling. Futures expire, so a fund has to sell contracts nearing expiry and buy later ones. When later contracts cost more than nearer ones, a condition called contango, each roll costs the fund money, and fund documents have described bitcoin futures as spending long periods in that state. Over time a futures fund’s return can fall short of bitcoin’s own.

The SEC and the CFTC warned in a joint investor bulletin in June 2021 that such a fund may not track the price of bitcoin, because futures prices can differ from the spot price and expiring contracts have to be replaced. A fund’s prospectus, filed with the SEC, explains how it works and what it charges.

What are the risks?

Futures carry the risks of holding bitcoin, plus those of leverage and expiry dates.

A deposit can disappear quickly. With leverage, a modest move against you can use up the whole deposit, and a fast market can liquidate a position before you can react.

Losses can exceed what you put in. Depending on the product and venue, you may owe more than your deposit. Regulators urge people to speculate only with money they can afford to lose.

Costs add up. Trading fees, the gap between buy and sell prices, funding payments and the cost of rolling all reduce results. Read the terms, because amounts vary and change.

Rules differ and change. What is legal or open to you depends on your country and sometimes your state. Taxes on futures can differ from taxes on holding coins, so ask a tax professional.

Complexity invites mistakes. Expiry dates, settlement terms, margin rules and liquidation prices vary by product, and many beginners lose money in leveraged trading.

Futures are built for traders and institutions. You do not need them to own bitcoin, and they add risks that holding coins or fund shares does not. A qualified financial professional can look at your situation, and the Start Here path covers the basics first.

Where to go next

• Bitcoin ETFs: What They Are and What They Mean for Investors: how spot funds work and how they compare with futures funds.
• Why Is Bitcoin So Volatile? And Can Anyone Predict a Crash?: leverage, forced selling and why swings are large.
• Is Bitcoin Regulated in the US? A Plain-English Overview: the roles of the SEC, the CFTC and the IRS.
• Common Bitcoin Scams and How to Spot Them: the fake platforms and guaranteed-return pitches to avoid.