Getting started with futures: Coinbase Derivatives
by Coinbase Derivatives LLC
In this article we’ll break down the basics of futures so you can start participating in the futures market. Here, we’ll dive into the Coinbase Derivatives Exchange so you can start getting familiar with different futures contracts as well as trading scenarios.
Introduction
Let’s take a look at Coinbase Derivatives, our CFTC-regulated futures exchange, to understand more about its products, how to access them, and what being regulated involves.
Coinbase Derivatives offers a number of futures contracts across crypto and traditional asset classes that are sized to meet the needs of a broad range of investors.
Contracts include:
Finding the right sized contract
When selecting futures to invest in, it’s important to understand the size of exposure to the underlying asset so you can select the right risk exposure for you. Some contracts are much larger, designed for institutional investors. Others are much smaller, designed for retail investors with smaller portfolios.
Coinbase Derivatives offers a variety of nano and micro contracts on assets that are either more volatile or more expensive. Both nano and micro contracts are smaller in size to make them more accessible for retail investors. This means they require less upfront capital, or margin, and in turn have less underlying exposure to the asset on a per contract basis.
For example, Coinbase Derivatives nano Bitcoin contract is priced at 1/100th of a Bitcoin, making it the smallest Bitcoin contract available to trade. Because it offers less exposure to Bitcoin, it ’s less expensive, offering lower risk exposure on a per contract basis. Due to its accessibility, however, it's a popular contract among investors who are new to futures or have smaller budgets.
A CFTC-Regulated Exchange
Coinbase Derivatives is regulated by the Commodity Futures Trading Commission (CFTC), which means it must adhere to strict rules designed to protect customers, promote the integrity of the markets, and ensure fair trading.
Being CFTC-regulated provides important safeguards such as ensuring the exchange manages risk effectively and maintaining transparency and precision in regulatory reporting. Additionally, Coinbase Derivatives must work closely with the CFTC when introducing new contracts to the market, and they can only offer these contracts to CFTC-regulated futures commission merchants (FCMs) and brokers.
You can access Coinbase Derivatives futures through these FCMs and brokers:
Coinbase Financial Markets
EdgeClear
Ironbeam
Ninjatrader
Optimus Futures
Stage Five Trading Corp
StoneX
WeBull
Trading codes
Each futures contract has a specific trading code for identification. This is made up of a product code as well as letters and numbers to indicate the contract’s expiration month and year.
The month of expiration has a corresponding letter:
January – F
February - G
March - H
April - J
May - K
June - M
July - N
August - Q
September - U
October - V
November - X
December - Z
And the year of expiration uses the last digit of the year. A contract expiring in 2024, for example, would have the number 4 at the end.
So let’s say an investor wants to open a position on a nano Crude Oil futures contract that expires in March of 2025. The product code for nano Crude Oil is NOL, so the trading code would be NOLH5.
Tick value
Futures also have a defined tick, or minimum price increment, set by the exchange.
For example, the tick size of a Polkadot (DOT) Futures Contract is $0.001 per Polkadot. Since each contract controls 100 Polkadot, the tick value is:
0.001 × 100 = $0.10 per Contract
So the value of one tick movement is $0.10 per contract.
Understanding the tick value is important because it determines the smallest possible price movement that affects your profit or loss. When you know the tick value, you can calculate the price of your position over any amount of time.
Reading candlestick charts
To start investing in futures, it’s also helpful to gain familiarity with candlestick charts. These charts represent the potential price movements of assets based on patterns of past movements.
The candlestick is made up of a body and shadows, or the candle and wicks, respectively. Together, these components convey the asset’s opening price, high, low, and closing price.
The shadows, or wicks, represent the asset’s high and low prices. The body, or candlestick, represents the opening and closing price, displaying the range between them.
Candlesticks are typically shaded green and red. A green candlestick means upward movement for the day, while a red candlestick means downward movement.
For example, let’s say that Polkadot opened the day at $4.50 and closed the day at $5.00. During the day however, it jumped up to $5.25 and dropped to $4.35. This is how that candlestick chart would read:
An investor could research futures by analyzing candlestick charts for a specified time period to try to predict in the short term how the price might move.
Recap
Key terms
Exchange
A marketplace where traders can buy and sell futures contracts. The exchange facilitates trading and ensures transparency, liquidity, and standardization.
Commodity Futures Trading Commission (CFTC)
A regulatory body established in 1974 that oversees futures markets.
Futures commission merchants
CFTC-regulated brokers and firms that facilitate the buying and selling of futures on behalf of investors.
Trading codes
A specific code for contract identification made up of a product code as well as letters and numbers to indicate the contract’s expiration month and year.
Tick value
A minimum price increment, set by the exchange, that determines the smallest possible price movement.
Candlestick chart
A kind of chart that represents the potential price movements of assets based on patterns of past movements. Its components convey an asset’s opening price, high, low, and closing price.
Getting started trading futures might seem a little confusing at first. However, when you understand a bit more about how to read trading codes and candlestick charts, it can feel a bit easier to navigate the market strategically and weigh investment options for the positions you might want to open on certain futures.
The risk of loss in trading futures can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.
