Bitcoin futures explained: how they work, margin, contango and futures ETFs

Years before spot bitcoin ETFs, bitcoin futures were trading on major US futures exchanges. They still matter: they’re behind bitcoin futures ETFs, and they explain why some bitcoin investments don’t move exactly with bitcoin.

This guide explains how bitcoin futures work, how margin and daily settlement affect you, why rolling contracts can cost money, and how futures funds differ from owning bitcoin. For leverage and liquidation in general, see crypto leverage and derivatives rules.

What a bitcoin futures contract is

The SEC and the CFTC describe a bitcoin futures contract as a standardized agreement to buy or sell a specific quantity of bitcoin at a specified price on a particular date in the future. They add that in the US, bitcoin is a commodity, and commodity futures must trade on exchanges regulated and supervised by the CFTC.

The CFTC explains the general features of futures:

• Standardized terms. The exchange sets the contract size, delivery months and last trading day, so many people can trade the same contract.
• A clearing house in the middle. It acts as the buyer to every seller and the seller to every buyer.
• Offsetting. Most futures positions are closed by taking an opposite position before expiry, rather than by delivery.
• Convergence. As expiry approaches, the futures price moves toward the spot price.

The contracts give you exposure to the price, but don’t give you ownership of the asset itself.

How regulated bitcoin futures began

On 1 December 2017, the Chicago Mercantile Exchange (CME) and the Cboe Futures Exchange (CFE) self-certified new bitcoin futures contracts with the CFTC. The CFTC explained in January 2018 that under the law, exchanges can list new products by self-certifying them, and that it had no grounds to block them.

Instead, it applied a heightened review. Its conditions included:

• high initial and maintenance margin for the cash-settled bitcoin futures. The CFTC said initial margin was set at 47% for CME’s contract and 44% for CFE’s, more than ten times the margin for CME corn futures;
• exchanges setting large trader reporting thresholds at five bitcoins or less;
• information-sharing agreements with spot platforms, and monitoring of spot prices for anomalies.

The CFTC argued that regulated futures also gave it the means to police the underlying spot markets for fraud and manipulation.

Margin and marking to market

You don’t pay the full value of a futures contract upfront. You post margin, which the CFTC describes not as a down payment but as a performance bond. Then:

• the position is marked to market every day, with gains added to your margin account and losses taken from it;
• if the account falls below the maintenance margin, you must post variation margin to bring it back up to the initial level;
• brokers, known as futures commission merchants, often require more than the exchange minimum.

A simple illustration. Suppose a hypothetical contract covers bitcoin worth $100,000 and the initial and maintenance margin is $40,000. If bitcoin’s price drops by $10,000 in a day, $10,000 is taken from your margin account, leaving $30,000. That’s below the maintenance level, so you must post $10,000 of variation margin to bring the account back up. If the price had risen, you’d have been credited instead.

The CFTC’s general guide gives 2% to 10% of contract value as typical margin for futures. The margins set for the first bitcoin futures in 2017 were far higher.

Contango and the cost of rolling

Futures expire. To keep exposure, a trader or fund must roll: close the expiring contract and open one with a later date. The CFTC explains that, often, expiring contracts sell for less than contracts expiring further in the future. This is called contango, and it means the trader pays a small “roll premium” each time.

The CFTC warns that small increases in price, month over month, can be a sizable drag on annual returns once trading and management fees are added. When later contracts are cheaper, the effect reverses and rolling can produce a “roll yield”.

Bitcoin futures ETFs

A bitcoin futures ETF issues shares that track the price of bitcoin futures. The CFTC explains that the fund typically sets up a subsidiary commodity pool that trades the futures, aiming to mimic bitcoin’s spot price. But:

• roll premiums and management fees reduce returns;
• futures don’t track spot prices exactly, so returns may never match the spot market;
• the SEC and CFTC note that a rise in bitcoin’s price may not produce a similar increase in the fund’s value.

Futures, perpetuals, spot ETFs and bitcoin compared

See perpetual futures in the US and bitcoin ETFs explained.

Who can trade them

In the US, futures are traded through registered brokers on CFTC-regulated exchanges. Check a broker’s registration before you trade. See how to check a trading platform with the CFTC and NFA. In the UK, firms have been barred since January 2021 from selling crypto derivatives, including futures, to retail consumers. See crypto leverage and derivatives rules.

The bottom line

The CFTC’s message on futures ETFs applies to futures in general: regulated doesn’t mean risk-free. Futures add leverage, daily margin calls and roll costs to bitcoin’s own volatility. If you simply want to own bitcoin’s price movements over the long term, compare the costs of futures with those of spot products before choosing.