With the CME Group announcing introduction of bitcoin futures by the end of the year, here's a primer on how bitcoin futures work and what investors need to do to trade in them. Just as in the general futures market, which often revolves around commodities, bitcoin futures allow customers to fix a set price at which they would like to sell or buy a certain quantity of the cryptocurrency at a fixed time in the future. This creates a leveraged position by increasing exposure to the asset while only posting collateral, but it also increases exposure to potential losses. (See also: CME to Launch Bitcoin Futures)

Even as it has risen to a position of prominence among the wider investment community over the past year, bitcoin has been subject to extreme fluctuations of price. (See more: Bitcoin's Price Making A Smart Recovery.) This persistent and steep volatility has some investors concerned about the entire bitcoin platform, although it does create trading opportunities. Now, many bitcoin exchanges offer the option of futures trading in the cryptocurrency. Heres how to go about trading in bitcoin futures.

Find an Appropriate Exchange

Not all bitcoin exchanges offer futures trades. The first step to being able to trade bitcoin futures is to find an appropriate exchange. BitMEX, CBOE, Deribit, and others all offer bitcoin futures, with new exchanges appearing all the time. When selecting an exchange, it pays to be thorough in your investigation. Make sure the exchange offers adequate security coverage and protection against fraud and theft.

Prepare to Trade

Each exchange will have a somewhat varied account setup procedure, but you should expect to have to input various items relating to your personal identity and investment interests. You'll have to populate your account with funds for trading, and in many cases, this is done via a bank or wire transfer, or a transfer from a different exchange. Some exchanges may allow the purchase of bitcoin futures contracts with other cryptocurrency assets, while most will allow you to purchase these contracts using fiat currency.

Understand the Contracts

Futures contracts allow users to hedge positions and mitigate risk. Bitcoin futures have generally come to be associated with miners who depend on the price of the cryptocurrency for their income. Some exchanges, like OrderBook, offer a standard contract size for a futures purchase, with typical instruments including the exchange between bitcoin and the fiat currency as well as information about the month and year for the contract.

Futures contracts can allow bitcoin investors to go long or short, purchasing "buy" contracts or "sell" contracts separately. (See more: How To Invest In Bitcoin Exchange Futures.) Whether you decide to go long or short will depend on whether you think Bitcoin's price is likely to climb or to fall by the set time specified by the futures contract.

While bitcoin futures may be best suited to investors with a large interest in the currency, there are also several arguments why customers should not invest in futures contracts, too. (See also: SEC Warns Investors About Scam ICOs.)

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