There are over 200 cryptocurrency exchanges open for business. Traders and investors now have an opportunity to buy and sell Bitcoin 24/7. Essentially, there are two different ways to invest in Bitcoin (BTC). Let’s explore each method.
Currently, the most common method of buying and selling Bitcoin (BTC) involves the cash market, also known as the spot market. The vast majority of cryptocurrency exchanges were established to handle cash trading. Buying and selling BTC on the spot market is a very straightforward transaction.
Let’s review an example of purchasing Bitcoin as a cash trade. In our example, Jane wants to buy $10,000 worth of Bitcoin. Jane has an account with her favorite cryptocurrency exchange. She places an order to purchase Bitcoin through her account. When Jane executes the order, the BTC price is $6,760.
Therefore, the cryptocurrency exchange deposits 1.48 Bitcoins (or whatever the equivalent is at the time) into her account. The transaction is complete and Jane owns 1.48 BTC in return for her $10,000. This is an example of a cash trade in an on the spot market; a very simple transaction.
Bitcoin futures trading is designed for aggressive traders who prefer a more speculative transaction with a greater risk/reward ratio. The main players in the Bitcoin futures market at the moment are the Chicago Board Options Exchange (CBOE) introducing the first officially regulated BTC futures contact in December 2017, and BitMEX, who’s been operating in the space since January 2014.
However, in December of this year, a new player is coming out on the scene. Digitex Futures will offer Bitcoin, Ethereum, and Litecoin futures contracts with zero commission fees. What’s the significance of zero commission fees in futures trading? Let’s review an example of a Bitcoin futures transaction to find out.
A Futures Trading Example
In our example, Jane decides to purchase a Bitcoin futures contract through the CME. However, unlike a cash contract, Jane is not required to pay the full value of the futures contract. Instead, Jane is only required to meet the margin requirement of the contract.
What is a margin requirement? It’s a “good faith deposit” collected by the exchange to cover a small percentage of the underlying value of the BTC futures contract.
Let’s assume the current price of Bitcoin is $6,760. The size of a BTC futures contract with the CME is 5 Bitcoins. Therefore, the total value of the contract is $33,800 (6,760 x 5). The CME margin requirement is equal to 43% of the contract’s value (multiplied by 110%).
Consequently, the current margin requirement is $15,987 (33,800 x 43% = 14,534 x 110%). In order to purchase one BTC futures contract, Jane is required to deposit $15,987 in her account. This is known as a “leveraged transaction” because Jane does not have to deposit the full value of the contract.
If Jane’s transaction was a cash trade, she would be required to pay 100% of the contract’s value, which is $33,800. However, because the trade was a futures transaction, Jane only needs to deposit $15,987 in her account.
Futures Allows for Greater Profit
As you can see, purchasing a BTC futures contract allows Jane to leverage her position because she is not required to pay the full value of the BTC contract. In fact, Jane could purchase two Bitcoin futures contracts for less than the value of one cash contract (15,987 x 2 = 31,974).
This explains why many cryptocurrency traders prefer to use futures contracts instead of cash contracts. It allows for a greater profit potential. However, leveraged investments like futures trading can be a double-edged sword.
In addition to greater profit potential, there is also the risk of excessive losses. The use of futures trading allows crypto traders the opportunity to purchase multiple contracts. At the same time, it also carries a much greater degree of risk.
Bitcoin Trading Continues to Grow at a Rapid Pace
In terms of volume, Bitcoin has easily exceeded the expectations of even the most optimistic cryptocurrency enthusiasts. These days, it’s not uncommon for traders and investors to buy and sell over 150,000 bitcoins per day (on the spot market). This represents over $1.1 billion in nominal value on a daily basis.
In regard to futures trading, daily volume has exploded during the past 12 to 18 months. For example, in mid-2017, BitMEX was handling over $100 million per day in volume. Today, BitMEX often generates over $1 billion in trading volume over the course of 24 hours!
Even though the CBOE and CME have offered BTC futures for less than 12 months, both exchanges have enjoyed tremendous increases in daily volume. These days, daily volume approaches 3,000 contracts in comparison to 1,500 contracts throughout Q1 2018. The futures market is on the rise and with more options like Digitex coming out, looks set to only grow faster.
A Change on the Futures Horizon
The Digitex Futures exchange is scheduled to open later this year. Digitex will be the first-ever commission-free futures trading exchange with its own native cryptocurrency, the DGTX token. As an added bonus, Digitex uses independent smart contracts on the Ethereum blockchain to improve customer security.
Because not all futures traders take a long position, Digitex allows traders to make money on small fluctuations in price. Through margin and leverage trading, they can make a viable income through high-frequency, low-profit trading–without seeing their earnings wiped out by heavy commissions.
Moreover, unlike CBOE and BitMEX, you don’t need to be a seasoned trader to learn how to profit from aggressive trading strategies. Thanks to the one-click trading system and focus on usability, traders new to the futures market will find Digitex provides a far softer learning curve.