Bitcoin Futures vs. Bitcoin Spot | Learn Which Trading Method Is Best for You

There’s no shortage of innovative ways for you to trade Bitcoin. The late 2017 introduction of Bitcoin futures contracts offered several advantages that spot market traders should carefully examine. However, even spot market Bitcoin traders have access to some perks too. Here’s a look at the pros and cons of trading Bitcoin futures vs. Bitcoin spot.

Choose Your Instrument

Let’s assume you’re a profitable Bitcoin trader and have been for several years. Which style of Bitcoin trading offers your trading capital the most bang for the buck? Should you trade Bitcoin futures or stay with Bitcoin spot on a traditional crypto exchange? 

Bitcoin’s Volatility = Ultra-High Contract Margins

Introduced in December 2017, the CME Bitcoin futures contract is cash-settled with quarterly expirations in March, June, September, and December. They also offer contracts in the “nearest two serial months not in the March quarterly cycle.” The contract size is five Bitcoins, so at a BTCUSD cash price of $3,400, you’re looking at a notional contract value of $17,000. (There is also a CFE Bitcoin futures contract available. The contract size is only 1 Bitcoin, so it’s better-suited for smaller-capitalized traders.)

However, you won’t need the full $17k to trade the CME contract. Initial margins (basis December 13, 2017 at TradeStation) are 70 percent of the futures settlement price (approx. $11,900). Overnight margins are smaller, being 64 percent of the futures settlement price (approx. $10,880). Compared to stock index futures like the E-Mini S&P 500 contract, Bitcoin futures boast an incredibly high percentage of initial and overnight margin percentage. Obviously, Bitcoin’s volatile nature is the reason for the huge margin deposit. No special margins for day trading are offered, however.

An attractive feature of trading futures can be the smaller trading commissions costs compared to trading Bitcoin on an exchange. For example, let’s say you want to go long three CME Bitcoin contracts at $5,000 for a day trade (you’re controlling $75,000 of Bitcoin). You use limit orders to open and close the trade. You manage a 4 percent gain on the trade, exiting at $5,200. At TradeStation, you will pay $4.50 to buy the contracts ($1.50 per contract) and $4.50 to sell them. That’s only nine bucks, plus a few pennies for regulatory fees, etc.

Percentage-Based Commissions on Bitcoin Spot Exchanges

Compare that price with a Bitcoin spot transaction at Kraken. Say you’d made the exact same dollar-value trade, buying $75,000 of BTCUSD with a limit order. You gained 4 percent on your trade, exiting with $78,000 in gross proceeds. You used no margin, going all-in with cash. The exchange calculates your commission as a percentage of the Bitcoin dollar value you transacted.

Counting the Cost

As a limit order buyer, you’d be classified as a maker. If your monthly trading volume is less than $250,000, your commission to buy would be 0.12 percent or $90. If you’d wanted to close out your long position using a limit order you’d also be classed as a maker. Makers (market makers) get nicked with a smaller commission than takers (using market orders, you’d pay a much higher commission of 0.22 percent). In this example, closing out your trade would cost 0.12 percent or $93.60. 

For that hypothetical, limit-order Bitcoin spot trade, you’d be looking at a round-trip (RT) commission of $183.60. That’s $174.60 more than the commissions for a three-contract CME Bitcoin futures RT trade. Both the futures trade and the Bitcoin spot trade controlled $75,000 worth of Bitcoin. 

A Smaller Day Trade

Now imagine you want to go for a two percent intraday move with Bitcoin trading at $3,400, and you nail it. Here’s how the commissions compare for limit orders:

Spot Bitcoin trade:

Long 5 Bitcoin units at $3,400   

Exit 5 Bitcoin units at $3,468

Gain is ($68 * 5 Bitcoin units) = $340

$340- $40.08 RT commissions = $299.20 net gain

Bitcoin futures trade:

Long 1 contract at $3,400   

Exit 1 contract at $3,468

Gain is ($68 * 5 Bitcoin units per contract) = $340

$340- $3 RT commissions = $337 net gain

If you made dozens (hundreds) of short-term trades annually, the commissions for trading Bitcoin spot would be substantially more than those for trading the equivalent futures contract dollar amount. Carefully consider your trading commissions, especially if you’re a hyperactive Bitcoin trader.

Commissions for Bitcoin trading definitely appear to be stacked in favor of the futures depending on the deal your broker cuts with you. However, maker and taker fees drop significantly if you have substantial monthly trading volumes at Kraken (and many other exchanges). For example, say you do a million dollars of monthly trading volume on Kraken. Your maker and taker fees will drop to 0.08 percent and 0.18 percent, respectively. 

Commissions Aren’t Everything and Trading Isn’t Easy

With that in mind, don’t let the higher commissions for Bitcoin spot trading scare you away from a traditional crypto exchange. Say you’re a long-term Bitcoin trend-follower or dollar-cost-averager (DCA) and you only make a few trades per year. You’re looking to score big gains with extended hold trades. Commissions costs aren’t going to eat up that much of your gross profit every year. You’ll also be free from the occasional hassles and hangnails that can afflict futures traders.

Active trading of Bitcoin or any other financial instrument is not for the timid, inexperienced or undercapitalized. Attempting to day trade Bitcoin (futures or spot) takes nerves of steel along with access to a quantifiable, proven trading methodology. If you’re an active trader, the lower commission bite of Bitcoin futures can help you make significantly more (or lose a lot less) money on every trade, compared to trading Bitcoin spot on an exchange. However, low commissions don’t mean squat unless you are a consistently profitable Bitcoin trader.

Here are the primary pros and cons of trading Bitcoin futures and Bitcoin spot on an exchange:

Advantages of Each

Bitcoin Futures:

• Cash-settled; no bitcoin changes hands
• IRS Section 1256 tax advantages (40 percent taxed at short-term capital gains rates, 60 percent taxed at long-term rates)
• No storage issues (leave your crypto wallet at home)
• No hacker issues are known to exist
• Regulated by the Commodity Futures Trading Commission (CFTC), all accounts insured against theft, etc.
• Low commissions (a must for day traders)
• Some futures brokers include a free or low-cost professional charting and analysis platform for account holders
• Spread trading and hedging opportunities are possible (ex.: short June futures, long September futures, etc)
• As trading volumes increase, options on Bitcoin futures become a possibility

Bitcoin spot:

• Leverage of two, three, four, or even five times is possible
• Market, limit, stop loss, take profit, settle position and combined orders available
• 24/7, 365 trading opportunities, and no weekend price gaps on your charts
• You can buy and sell Bitcoin in fractional units (small-dollar trades possible, great for DCA investors)
• Some exchanges offer fully insured accounts (no hacker or theft issues)
• Some exchanges provide low-cost, offline cold storage
• A variety of exchanges offer basic charting, technical indicators, and other trader tools

Disadvantages of Each

Bitcoin Futures:

• Bitcoin futures don’t trade from Friday afternoon to Sunday afternoon
• Market orders are not available, only limit and stop limit orders
• The initial margin deposit is around 70 percent of the contract value, so there’s not much leverage available
• Large price gaps are possible on your charts because of the weekend trading halt
• There’s a possibility of limit-up and limit-down moves against you
• No fractional contract sizes are available
• It’s vital that you pay attention to the contract roll date
• Bitcoin futures are still a relatively low-volume market
• Low-volume markets are especially vulnerable to spikes as big players move size
• Bitcoin futures may not be appropriate for long-term speculation, with the exception of hedge fund managers or wealthy investors

Bitcoin spot:

• High commissions can make day trading an unappealing proposition
• Hacker and theft issues are possible, depending on the exchange
• No IRS Section 1256 tax advantages
• Margin interest and roll expenses apply
• Low-volume markets are especially vulnerable to spikes as big players move size
• You may need to pay for an external charting and analysis platform to get pro-quality indicators, trading systems, order flow and order entry tools
• You must continually stay abreast of all rules, regs and tax issues that affect Bitcoin

Bitcoin Futures vs. Bitcoin Spot

If you’re a highly skilled day trader, Bitcoin futures look like a viable alternative to trading Bitcoin spot on an exchange. You’ll enjoy low commissions costs and the convenience of cash-settlement. These are perhaps the two most compelling advantages, as compared to trading Bitcoin spot.

However, if you’re a swing trader, long-term trend-follower or DCA investor, trading Bitcoin on an exchange may be a less stressful pathway. You won’t have to deal with messy price gaps on your charts on Sunday evening (and especially on Monday mornings). You’ll have complete control over the amount of leverage you desire (zero or up to five to one), whereas Bitcoin futures traders do not. When you trade Bitcoin spot on an exchange, you have far more order types to choose from, as compared to futures traders.

Perhaps best of all, when you trade Bitcoin spot without any leverage, a sudden market shock against your position won’t necessarily wipe you out. A sudden overnight move in Bitcoin from $3,500 to $7,000 (don’t think it can’t happen) might easily destroy your Bitcoin futures account (if you’re short), leaving you with tens (hundreds) of thousands of unpayable debts. Same goes for those short Bitcoin spot with three, four, or even five times leverage.

Come to your own thoughtful conclusions regarding the Bitcoin futures vs. Bitcoin spot issue. Each type of trading comes with plusses and minuses, and it’s up to you to make the appropriate choice based on your own unique circumstances.

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