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Bitcoin Futures Trading Strategies
Table Of Contents
Learning the most popular Bitcoin Futures trading strategies in use today can be a smart way to improve your positioning and overall crypto skill level. Savvy investors understand that no one can predict with 100% accuracy the turns the market will take. However, there are some methods traders use to reduce their risk and improve their profits.
Every trader needs some sort of plan. This strategy provides you with a roadmap to help you remain consistent. A trading strategy helps you to separate your investment decisions from your emotions. This plan will help you decide when to enter and exit trades. It will also help you to recognize opportunities such as emerging trends.
The good news is that Bitcoin Futures are by far the most traded cryptocurrency derivatives. As such, there is more liquidity in the market than ever. Additionally, multiple platforms now offer Bitcoin Futures trading options.
What are Bitcoin Futures?
Prior to trading any asset, you need to understand its primary purpose. In the case of Bitcoin Futures, the main purpose is market speculation. This speculation also helps steer the Bitcoin market. If investors flock to Bitcoin Futures contracts with higher premiums, Bitcoin will experience a price increase in most circumstances.
When you trade Bitcoin Futures, it’s important that you utilize all the information at your disposal to make an educated guess as to the future market movements of Bitcoin. Importantly, Bitcoin Futures allows you to earn profits even when the market value of Bitcoin decreases. When investors believe that an impending drop in Bitcoin's value is imminent, they will open short contracts. Opposingly, if you believe the value will increase over the life of the contract, you would want to open a long contract.
Shorting an asset is a popular strategy used by stock traders for decades. When you open a short position, you borrow Bitcoin via leveraged trades. Then you sell all of your holdings. Once the price of Bitcoin drops to your predetermined exit, you buy back Bitcoin at the lower price. You can then repay the lender and keep the difference between the sell price and the buy price as your profit.
A long position simply means that you want to lock in Bitcoin at the price of your contract because you believe it will be much higher at the end of the agreement. You would open your contract at today’s price for a later date. When the date arrives, you can sell your Bitcoin and keep the profits.
Risk Management Strategy
Another popular use for Bitcoin Futures is by the mining community to mitigate risk exposure due to market volatility. Miners will use Bitcoin Futures to lock in their profits earned from validating transactions. A miner can use a futures contract to guarantee they don't take losses due to volatility in the market. Not surprisingly, It’s common for miners to sell their Bitcoin at a premium via futures contracts.
Reputable Exchanges Offering Futures
Top exchanges that offer these unique financial instruments include Ameritrade, CME, OKCoin, BitMEX, and Huobi. This diversity provides investors with a wide variety of contract options. Interestingly, there are around $10 billion in Bitcoin Futures contracts trading daily. This liquidity directly equates to more market opportunities for investors willing to take the time to master their skills.
Usually, Bitcoin Futures trade at a premium rate when compared to the spot price. There are many reasons for this occurrence. The main factor for it is investor speculation. Next, there is interest parity. This is a formula that governs the relationship between Bitcoin and USD and the future value of each based on the borrow/lend rates.
Speculating on the Market
If you want to be a successful Bitcoin Futures trader, you need to polish up on your speculative skills. The first step in this process is to begin monitoring the price of Bitcoin obsessively. You will want to pay attention to the spot price and any major changes in market capitalization.
Another smart strategy is to watch the overall market momentum. The cryptomarket will often move in correlation to Bitcoin and vise versa. If you see the entire market is going green, there is a great chance that Bitcoin will follow the rest of the market. Additionally, when Bitcoin moons, it usually reverberates throughout the entire altcoin market. This linked movement isn't guaranteed. When Bitcoin moves separately, or even opposingly, from the altcoin market it's known as uncoupling.
Once you have a feel for Bitcoin's current market movements and how they play into the overall crypto markets momentum, you are ready to examine outside factors. Items such as news stories, coverage, and regulatory issues are all worthy of your attention. Any news that might improve or delay Bitcoin's large scale adoption is worth noting. Crucially, regulatory news can have the largest effect on the price of this asset. Your job is to gather this news and make an assumption as to its impact on the network.
Educated Price Predictions
This strategy will require you to make educated guesses to the value of Bitcoin at a later date. Also, you need to determine when would be the best time to exit your investment. Your exit strategy should include both scenarios. You want to know when to cash out your profits. Also, you need to know when to exit the market and cut your losses. Remember, Bitcoin continues to experience high volatility and its market value can rise or decline very abruptly. Consequently, Bitcoin has proven to be historically difficult to predict.
Additionally, the relative newness of the entire industry leaves investors with a lack of reliable comparable. Comparables are other market situations or assets that closely resemble the ones in question. With traditional assets, studying the movements of closely related assets can help provide additional insight into potential developments in the future.
The good news is that Bitcoin futures usually consist of contracts with longer time periods and Bitcoin has proven itself to tend to rise in value over time. Overall, Bitcoin experienced almost 9 years of market value growth before the major corrections of 2018-2019. When an asset continually experiences a Futures price that is over the spot price, it's known as being in a state of contango.
Two Types of Bitcoin Futures
Today, there are two main styles of Bitcoin Futures contracts available to investors – fixed-maturity futures and perpetual contracts. These contracts share many characteristics with the main distinctions emerging in the fee format of each:
Fixed Maturity Futures
In a fixed maturity Bitcoin Futures contract you pay a predetermined premium when you open your position. You may also pay a fee at the expiration of your contract.
Perpetual contracts offer you a different pay structure. You pay a fluctuating rate. This rate adjusts around four times a day, or every eight hours.
Trading in Different Market Conditions
The good thing about trading Bitcoin Futures is that if done correctly, there is room for profit in either a bull or bear market scenario. It’s important to understand the contrast between these two markets and how it should correlate to your overall trading strategy.
In a bull market, investors will open long positions and wait out their profits. Since Futures have a tendency to trade at a higher value than the spot price, bull runs can bring higher premiums to the market. These rising prices are the direct result of investors positioning to prepare for the foreseen increase in market value.
Reversely, bear markets create a scenario where futures can trade at a lower value than the spot price of an asset. These price drops are the result of investors seeking to preserve capital and reposition for future movements.
The industry standard places most futures contract expiration dates on the last Friday of the month. These contracts include both monthly and quarterly agreements. Knowing this information can help you to align your investment strategy with upcoming developments within the sector.
Bitcoin Futures Payment Structures
Currently, the most popular exchanges offering Bitcoin Futures rely on two main payment structures. The first option is the inverse pay structure. In this scenario, you put up BTC as collateral for your investment agreement. The second style of payment structure is referred to as a linear payment structure. The main contrast being that linear futures contracts require you to make your payments in USDT directly.
Interestingly, the last 2 years has also seen the emergence of hybrid payment strategies. These contracts provide investors with a bit more flexibility in terms of payment types. You can even choose different currencies to receive your profits. This scenario benefits investors who may require some profits paid in USD, while others remain in cryptocurrencies.
There are also opportunities to earn profits from the price variances between exchanges at times throughout your contract. Traders will often use this spread, which is also known as the “basis” to earn some quick profits. Importantly, this strategy requires you to arbitrage. Arbitrage is one of the oldest forms of commerce known to man. Bitcoin arbitrage occurs whenever an investor engages in the simultaneous buying and selling of Bitcoins in different markets or in derivative forms with the goal to leverage price inefficiencies between platforms holding the same asset. Arbitrage is possible whenever you notice:
- The same asset trades at different prices in different markets
- Two assets with the same cash flow are not trading at the same price
- When an asset has a predicted future price but doesn't trade at that price
The earliest forms of arbitrage involve simply purchasing an asset in one location and bringing over to another location and selling it for a profit. Today those that live near a border-crossing are uniquely positioned to participate in this type of commerce. Luckily, digital assets give us the ability to trade as if we were located anywhere globally.
When dealing specifically with the arbitrage of cryptocurrencies, there are a few other considerations to ponder. First, you want to seek out low trading fees to ensure your profits don’t get gobbled up in the transaction. Next, you will need to consider the speed at which your asset transfers. In the case of Bitcoin Futures, the exchange times vary greatly depending on the platform you utilize. Lastly, you want an asset with high volume. Luckily, Bitcoin Futures provide all three of these scenarios frequently.
Bitcoin Futures Trading Strategies
Now that you have a better understanding of some of the basics of Bitcoin Futures trading, you are ready to learn about the three main trading strategies used by investors today. The great news is that these techniques can be used on nearly any asset class that offers futures. The two main techniques are:
- Cash-and-Carry Futures Arbitrage
- Inter-exchange Premium Arbitrage
Cash and Carry Premium Arbitrage
The Cash-and-Carry futures trading strategy is the most popular in the market for many reasons. Primarily, its popularity stems from its market neutral approach. If done correctly, the cash-and-carry strategy minimizes risk exposure for the investor. This reduction in risk exposure is due to the way in which this technique anticipates any market movement. The main goal of this technique is to exploit pricing inefficiencies in the spot price
Basics of Cash-and-Carry-Arbitrage
The first step in a basic cash-and-carry-arbitrage is to evaluate the market. You will need to closely monitor the percentage difference between the current spot price of Bitcoin and the price of Bitcoin Futures contracts. Begin making daily notes of the price percentage at a certain time per day. This data will allow you to compile a better awareness of how the two price points correlate.
Next, a Bitcoin Futures arbitrageur would make two purchases. The first purchase would be a long position in Bitcoin. Importantly, this is a direct investment into Bitcoin. The investor would then open a short Bitcoin futures contract at the same time and for the same amount. Critically, this contract needs to be at a price considered expensive by the investor.
In most instances, you will notice the futures contracts experience more intense price volatility than Bitcoin directly. They also trade for a much higher value usually. However, there are instances where the Futures fall below the spot price as well. You will need to use your chart to determine when the Futures price uncouples from the spot price.
When the contract expires the investor fulfills their obligations using the Bitcoin originally purchased. The difference between Bitcoin's current spot price and the cost of the futures contract is the profit. This opportunity is present whenever the inflow from the short futures position exceeds the acquisition cost and carrying costs on the long asset position.
Not Full Proof
It is true that the cash-and-carry method does limit risk in certain market conditions. However, this strategy can do nothing to buff increases in carrying-costs. Keenly, you will want to monitor your fees and other factors such as margin costs. All of these can add up and chip away at your profits over time.
Inter-Exchange Premium Arbitrage
In the inter-exchange investment strategy, you are seeking to make a profit off of the variability in futures prices from one platform to another. There are many ways to accomplish this task. The simplest form is to find Bitcoin futures price gaps between platforms and trade your asset between each to earn the profit. While this may sound simplistic, there are some additional risks to avoid.
One of the first things you want to examine is the trading pairs offered by the platforms. You may find that a certain Bitcoin trading pair is overpriced compared to the competition. Some investors may even choose to examine three trading pairs to find inefficiencies. This technique is called intra-exchange triangular arbitrage.
Today, there are a number of Dapps and bots in the market that can help simplify this process. Additionally, traders often build custom scripts to monitor the value of assets across different platforms. There are even instances of developers automating the entire process throughout the day. In this way, they can slowly stack up tiny earnings throughout their trading activities.
Inter-Exchange Arbitrage Risks
In this situation, you need to pay careful attention to the liquidity of the assets in question, the transaction fees, and the transfer times. Inter-exchange arbitrage is a time-sensitive operation that can be ruined if the asset you send takes hours to reach the other exchange. You can monitor the fee rate of Bitcoin and trading volume to feel out the approximate wait time for a transaction your time and fees. Also, be sure to make sure that the exchange is not experiencing delays in deposits or withdrawals. All of these scenarios can make you miss the narrow time window you have to complete your arbitrage trade.
Summary – Trading Bitcoin Futures
Trading Bitcoin Futures is a delicate process that takes time to master. The great news is that once you have developed a reliable trading strategy to follow, you can simply put your investment vehicle in drive and begin to gain experience immediately. The key to your success lies in your ability to assess the Bitcoin market and speculate as to the future price of this digital asset. Luckily, you are now armed with the most popular futures trading strategies in the market.
David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com
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