As a responsible crypto investor, you must understand the differences between utility tokens vs security tokens. These tokens serve different purposes in the cryptospace. Their processes differ during trading and issuance. These contrasts make security tokens unique to their utility counterparts.
Why Do We Have Security Tokens?
The ICO market continues to expand. According to a report from Business Insider, companies raised over $5.6 billion in 2017. While this number seems impressive, the ICO activity of this year already eclipsed it. By May 2018, the ICO market expanded to $6.3 billion. This record growth and the growing appeal of ICOs makes this unique crowdfunding strategy a favorite among tech startups.
The record growth of the ICO sector led to increased scrutiny from regulators such as the Securities and Exchange Commission (SEC). The task of developing regulations for the growing ICO market falls on this organization depending on how the token’s use. The SEC decided that when a token represents ownership, voting rights, or entitles the holder to share of future profits, it’s a security token.
Utility Tokens vs Security Tokens – How can I Tell the Difference
It isn’t always that easy to determine if a coin is a security or utility token. In many instances, a token starts off as a security during an ICO but later evolves into a utility token. This scenario is the case for the hugely popular cryptocurrency Ethereum (ETH). In a June ruling, the SEC determined that Ethereum operated as a security initially, but today it’s a utility token.
To make matters more complicated, a utility token such as ETH can have security tokens issued on its platform. Ethereum’s ERC-20 protocol is the most popular token launching protocol in the cryptospace. New tokens issued on the platform are security tokens if they fail the “Howey Test.”
The “Howey Test” is a brief questionnaire created by the Supreme Court for determining whether a transaction qualifies as an investment contract. The test became famous during the 1946 Supreme Court case SEC V. Howey. The case revolved around a Howey, Florida-based orange juice company that offered large parts of its land for sale to investors with the intent of having the new owners lease the property back to the citrus developer, who would continue developing the area with the newly acquired funds.
The SEC sued the defendants in this transaction for violating the Securities regulations. The SEC determined that because the investors put forth funds in the hopes of making a profit from the efforts of the citrus farm, the deal was an investment contract. Therefore, the agreement falls under securities regulations.
The Supreme Court developed a simple test to prove the theory. The Howey Test asks investors four critical questions. These questions can be applied to tokens to determine if they are security tokens:
- Are You are Investing Money?
- Do You Expect Profits from Your Investment?
- Are You Investing in A Common Enterprise?
- Will You Profit from the Efforts of a Promoter or Third Party?
Utility tokens serve a use within a platform. In most cases, companies host ICOs to issue utility tokens. These tokens are essential to the functionality of their platforms. Additionally, they do not give token holders rights to the company’s future development or profits. These tokens transfer without regulations, and any company can offer utility tokens without meeting SEC regulations. The open nature of these tokens made them a favorite amongst investors and startups.
Security tokens operate in a much different manner, and under different requirements. A company cannot just host a security token offering (STO) without fulfilling specific conditions. Companies must provide investors with a plethora of information including the company’s actual address, the names of all board members, and open financial records. These requirements protect investors from fraudulent activity.
On top of the company regulations, investors meet stringent security regulations as well. Companies cannot sell security tokens to anonymous individuals. You will need to provide and prove your identity when investing in these tokens. Know Your Customer (KYC), and Anti-Money Laundering (AML) laws must be adhered to when moving security tokens between owners.
Added Security – Added Investment Funds
While some early crypto investors undoubtedly see security tokens as a burden on the cryptospace, many believe these tokens to provide an essential bridge between traditional investment funds and the cryptomarket. Analysts have predicted a rise in traditional investment firms entering the cryptospace.
These firms require added protection due to the substantial nature of their investments. Security tokens provide them with the protections they need to avoid future financial and legal problems.
Utility Tokens vs Security Tokens
Now that you better understand the differences between these tokens, you are ready to comprehend STOs and what makes them different than their ICO counterparts. Security tokens play an important, and ever-growing, role in the cryptospace. You should expect more platforms entering the cryptomarket using this type of token over the coming months.
What is Cryptocurrency Trading?
Ever since 2017, cryptocurrency trading has been an area of interest for new and old investors alike. Notably, cryptocurrency trading involves speculating on future price movements within the market. In its simplest form, trading requires the buying and selling of cryptocurrencies in a manner that produces profit. In order to accomplish this task, you need to have a firm grasp on what cryptocurrencies are and what affects their market movements.
Cryptocurrencies are decentralized digital assets that rely on a network of computers to validate their authenticity and the overall state of the network. Unlike fiat currencies such as the dollar, there is no government or central authority backing these coins. Instead, cryptocurrencies rely on mathematical protocols to reduce human intervention and provide the world with a truly unique financial instrument.
Importantly, cryptocurrencies exist only as a shared digital record of ownership. This means you can’t handle or even touch a cryptocurrency. Instead, these assets exist only in the digital realm. Consequently, no crypto transaction is complete until it is verified by the network nodes (miners) and added to the blockchain.
Different Blockchain Assets Require Different Approaches
Interestingly, there are multiple different types of blockchain assets one can trade today. Each asset has its own regulatory and trading requirements that you must adhere to. The three main types of blockchain assets in the market today are cryptocurrencies, utility, and security tokens.
Luckily, buying and selling cryptocurrencies has never been easier. Today, there is a multitude of exchanges in the market at your disposal. Each of these exchanges provides a different UX and features. As such, it’s recommended that you take a look at a few exchanges before you make your final decision. Also, savvy investors will also trade between exchanges when there is an opportunity to earn revenue on the spread of a certain asset.
It’s recommended that you stick with reputable exchanges. The reasons for this are simple, every couple of months some exchange experiences a hack that drains the platform of its holdings. When this occurs, you can lose your cryptocurrency if the exchange doesn’t have the ability to refund your losses. A perfect example of this scenario playing out occurred during the now infamous Mt.Gox hack where investors lost millions. Here are some of the most recognizable exchanges to consider:
The Binance exchange entered the market in 2017 with the goal to simplify the trading process for normal investors. The firm’s founder, Changpeng Zhao was already well known in the FinTech sector as the premier developer of high-frequency trading software. This technological know-how helped Binance create a unique UX and cement its position as an industry leader.
This simplicity helped the exchange grow. By 2018, Binance was the largest cryptocurrency exchange in the world in terms of trading volume. Today, the exchange still dominates the sector. Binance has since opened multiple platforms including Binance US, Binance DEX, Binance KR, and Binance Australia, to name a few.
The Singapore-based crypto exchange KuCoin was one of the first platforms to enter the market. Reports confirmed that developers began market research for this exchange as early as 2011. In 2013 KuCoin entered the crypto market as a dominant player.
Today the platform is known for its state of the art technology. The exchange features a combination of reliable and extended technical architecture. In this way, developers have been able to streamline the standard trading operations encountered by users.
The Poloniex exchange entered the market in 2014 with the aim to provide US clientele safe access to digital assets. Currently, the firm has a headquarters located in the Greater Philadelphia Area of the Southern US. The founder of the exchange, Tristan D’Agosta, is known for living a private lifestyle, despite making Fortune magazine’s 40 under 40 list.
Poloniex is known for its accessibility and overall market positioning. Today the platform offers over 100 BTC trading pairs. Additionally, traders are privy to advanced charts and data analysis tools to help further their investment strategies. Notably, the exchange charges a 0.2% transaction fee on all trades.
Bittrex is another market leader to consider. This firm has been in operation since 2016. The developers behind this platform wanted to create an institutional brokerage firm that could help bridge the gap between the traditional financial sector and the crypto markets.
Bittrex is well known for its industry-best security practices. Currently, the platform is one of America’s leading blockchain technology providers. As such, it enjoys a reputation as one of the most reliable exchanges in the world.
Let the Cryptocurrency Trading Begin
Once you have chosen an exchange that is known for its quality and security, you are ready to begin trading. Keenly, the setup process is simple. You just need to register with your new platform and fund your online wallet. Funding your wallet can vary in the processes required and depending on if you want to fund it with fiat currency or using other cryptocurrencies.
Notably, there is a tiny learning curve that you must overcome when switching between platforms. Each exchange utilizes a slightly different approach and interface. Additionally, there are variances in transaction times, costs, and daily limits to consider.
You will also need to take into account your location. Certain exchanges do not permit users from specific countries to participate in their platform. For example, you can only trade on exchanges that require KYC and AML regulations if you live in the US.
Whenever you are investing directly in cryptocurrencies, you purchase the coins themselves. This strategy means that you will hold the cryptocurrency you own and not just some form of ownership rights. It also means that you must pay the full value of the asset to open a position. Additionally, you will be responsible for finding a reliable wallet to store your holdings.
What Moves Cryptomarkets
Cryptocurrency trading requires you to make educated guesses as to market movements in the future. While no one can predict these movements with 100% accuracy, there are still some techniques used by professionals to mitigate risks while trading.
The first thing you need to understand is what actually effects market movements in the sector. Unlike stocks, cryptocurrencies are uncoupled from many of the economic and political concerns that affect traditional markets. In most instances, the cryptocurrency market moves according to supply and demand. Here are some important factors to consider:
The supply of a particular cryptocurrency refers to the total number of coins the firm will issue over the entire lifespan of the project. It also references the time frame and structure that these coins will be introduced to the market. Importantly, you also need to take into consideration the number of coins destroyed or lost as well.
The next factor you need to examine is the total market capitalization of the project you are interested in. The market cap is the total value of all the coins in existence for a certain project. Understanding the growth and retractions of a tokens market cap is critical to making informed price speculations.
Importantly, not all factors that affect the market’s movements are technical in nature. One of the most influential market movers in the sector is the media. You must pay close attention to how the media portrays cryptocurrencies. You will want to be aware of any potential developments that could boost or hinder large scale adoption in the sector.
Specifically, regulatory news can play a huge role in the market capitalization of a cryptocurrency. For example, the market took a big hit when China began a large scale cryptocurrency crackdown at the end of 2017. Considering the sheer size of the Chinese market, investors could easily tell that this decision would negatively affect the market in some way.
The next point to consider in your investment strategy is how well the coin in question is able to integrate into the current financial system. Tokens that feature easier integration are more likely to experience rapid growth in the market. This growth can be substantial when a coin is introduced to an already existing network.
A perfect example of integration providing a huge potential for upside growth can be found in Facebook’s Libra token. While this token is still under development and undergoing regulatory approval, it has more upside potential than most new projects in the sector. The reason for this inherent value stems from the fact that the Facebook network encompasses billions of international users.
Major events within the sector can provide a boost to the value of your investment in different ways. One such event, known as the halving recently took place within the Bitcoin ecosystem. This event occurs roughly every four years when mining rewards are halved. Historically, these events are followed by rising market values.
Cryptocurrency Trading Terminology
Like any profession, trading cryptocurrencies requires you to learn some new terminology. Luckily, this terminology is standard across the trading industry. Consequently, you will also gain valuable insight into trading other assets such as stocks and commodities.
The spread is the price difference at which you buy or sell your cryptocurrency. As such, spreads are variable depending on the assets, time of the trade, and the time it takes to complete your transaction.
When discussing trading assets, you may encounter the term lots. In this instance, lots is simply the term used to describe batches of cryptocurrencies used to standardize the size of trades. In most scenarios, a lot can consist of a single coin. These small lots are popular in the crypto space because they help to mitigate risk to volatility.
Cryptocurrency futures are agreements to purchase or sell crypto at a set price. Notably, these financial instruments allow investors to earn profits from cryptocurrencies without the need to actually own the assets directly. Nowadays, futures are used by investors to maximize profits. Miners also use futures to lock in profits against drops in value.
One of the advantages of trading futures is the ability to utilize leverage. Leveraged trading is an advanced investment strategy. It requires an investor to take a short term loan to fulfill their investment. In this way, investors can gain access to larger investment opportunities without the need to fully pay for the assets upfront. Leveraged traders only need to pay a small deposit when they open their position. This deposit is also called the margin.
The margin is the initial deposit you put up to open and maintain a leveraged position. Keenly, you need to be aware that margin requirements will change from broker to broker. Also, the size of your trade will play a part in how large of a margin is required.
Pips are units used to measure movement in the price of a cryptocurrency. The Pip can change depending on the platform and the pairing used. For example, in the US you can say that a coin raised one Pip in value if its market value went up one dollar. The key point here is that pips refer to a one-digit movement in the price at a specific level.
Another common phrase that you will encounter if you trade cryptocurrencies in the US is KYC/AML. Know Your Customer (KYC) and Anti-Money Laundering Laws (AML) refers to a legal framework that requires exchanges to verify the identity of users. All regulated exchanges in the US and EU require AML and KYC.
Trading cryptocurrencies can be a great way for you to earn some extra Satoshis and improve your understanding of the market. Remember, the difference between a successful investor and one that fails usually comes down to the level of research and their ability to stick to their investment strategy. Savvy investors know that the secret is to stay vigilant in your market assessments and you are sure to see some gains.
What is a Bitcoin Hardware Wallet?
A Bitcoin hardware wallet is a device that enables you to store your cryptocurrency safely offline, also known as cold storage. These units function similarly to a digital bank account. Just like a mobile wallet, you can send, receive, and track your balance directly from your hardware wallet.
Hardware wallets are considered the safest method to store your cryptocurrencies by most in the industry. These futuristic items secure your Satoshis in a couple of different ways. First, the device encrypts the access to your coins. This encryption provides you with an extra layer of security when you do have your hardware wallet online.
Importantly, someone can’t just steal your hardware wallet and access your cryptocurrencies. Most devices include an additional pin code requirement. In this manner, your crypto gains an extra level of security against theft or losses. Notably, if you lose your pin, you will need to restore your wallet using your factory issued backup pin.
Bitcoin Hardware Wallets
The main variance between your traditional crypto wallets and hardware wallets is that latter has a physical form. Since hardware wallets exist in the real world, there are some additional factors to ponder when purchasing one. You will want to decide on a hardware wallet that fits your lifestyle. If you are an active person who utilizes their cryptocurrency often, you will require a smaller device that provides you with the portability your lifestyle requires.
No matter what size or style hardware wallet you choose, you will need to ensure that you store your new device securely. Remember, your hardware wallet can be lost, stolen, or destroyed if not stored properly. To avoid these concerns, it’s recommended that you maintain your hardware wallet in a location that is secure and dry. The good news is that even if your wallet gets destroyed or stolen, you can still access your crypto via a backup seed.
Seed phrases are a group of random words that grants you access to your cryptocurrency within a crypto wallet. They are extremely popular in both hardware and mobile wallet applications, and for good reason. Always store your backup phrase in a secure location. If you lose your backup phrase and your hardware wallet, your crypto is gone forever.
Cold Storage Vs Hot Wallet
To understand the importance of hardware wallets, you need to understand the distinctions between keeping your Bitcoin in cold storage and a hot wallet. These terms simply refer to the internet state of the device. Mobile wallets such as your favorite crypto Dapp require an internet connection to function. This internet connection also functions as a potential attack vector for hackers seeking access to your holdings. Hardware wallets only communicate to the internet when you directly attach them to the network. In this way, hardware wallets are the most secure option for crypto enthusiasts.
Keenly, the largest crypto holders utilize hardware wallets to protect their vast empires. In particular, the Winklevoss twins have been quoted as stating they keep their crypto in hardware wallets with the seed phrase distributed across multiple bank security boxes. Considering they are Bitcoin billionaires, this strategy makes sense. While you may not hold millions in crypto, it’s still smart to own a hardware wallet to secure your holdings. Luckily these devices are now more affordable than ever.
How Do I Get a Bitcoin Hardware Wallet
Today, there are all types of cryptocurrency hardware wallet manufacturers. You will want to stick to the most reputable brands to ensure that there are no unforeseen attack vectors or hardware issues. Critically, you don’t want to purchase a hardware wallet from a company that may be out of business in a few months. Also, a brand new manufacturer may have some bugs to work out in their product.
General Tips for Securing Your Bitcoin Hardware Wallet
In general, there are some important guidelines you should follow to keep your crypto safe on hardware wallets. The first thing you want to do is obviously ensure your device is physically secure. If your house burns down and both your wallet and key phrase where in your house, your day just got worse.
Additionally, you will need to keep the firmware on your device updated. Companies release updates commonly to patch security issues. If you fail to keep your device updated, you could fall victim to an outdated attack vector. Also, never leave your hardware wallet plugged in. It defeats the purpose of owning a hardware wallet if you leave it connected to the internet.
Unfortunately, the overall newness of the crypto sector has left many people in a state of confusion as to how to best protect their earnings. Recently, there has been an uptick in hardware wallet scams in the market. These scams usually follow a few easily recognizable strategies.
Never Buy a Used Hardware Wallet
Given the important role your hardware wallet will play in your blockchain investment strategy, it’s recommended to stick with new devices. Used hardware wallets can be altered or even pre-hacked prior to you receiving the unit. Additionally, only reputable manufacturers should be n your watch list.
The first, and most common, is phishing attacks. Never give your wallet backup phrase out to anyone. Scammers will often pose as the manufacturer of your device and ask for information such as your backup phrase as a means to verify or assist you in some way. Once you give someone your backup phrase, you have forfeited your Bitcoin.
Another more elaborate Bitcoin hardware wallet scam involves selling used devices online. Scammers will open the devices, make note of the backup phrase, and then sell the unit. In one case, a person purchased a used wallet from eBay. Everything was great for the first week, then, all of a sudden, the person’s crypto disappeared.
Further investigation revealed what had occurred. The scammers had a preconfigured backup phrase hidden on a fake scratch card. He resealed the hardware wallet in its original packaging and instructed the new owner to backup his new device with the faulty seed phrase.
The new owner believed they were the first person to open the box and proceeded to load it up with multiple Bitcoins. The hackers where then able to simply use the backup phrase to regain access to the device and send all of the Bitcoin elsewhere. Sadly, the scammers made off with the life savings of this individual.
Top Wallet Providers In The Market
There are currently two manufacturers that dominate the Bitcoin hardware wallet sector – Trezor and Ledger. Both firms offer some unique features and styling to suit your needs. Additionally, both companies have an excellent reputation and have provided their products to the market for years.
The Trezor line of Bitcoin hardware wallets features a sleek design that resembles a car alarm beeper. This user-friendly layout is simple to navigate and easy to store. Additionally, Trezor’s line of hardware wallets offer a wide variety of interoperability. Users can store Bitcoin, as well as multiple other altcoins including ERC-20 tokens. Trezor devices include advanced features such as an advanced Android application to monitor your holdings. Users of these devices also enjoy a Chrome extension and access to MyEtherWallet online login portal.
Trezor offers a range of products to the market. Their premier wallet is the Trezor T. This compact device features many upgrades from their original model. There is an easy to navigate touch screen and the device includes a USB-C connection and microSD card slot.
Ledger is the most popular wallet provider in the market at this time. The company has provided reliable hardware wallet services since 2012. Ledger wallets are best known for their miniscule design and advanced features. On top of a Chrome extension, the device integrates with Copay, Electrum, Mycelium, MyEtherWallet, and GreenBits.
Ledger Nano S
Ledger’s most popular product is the Nano S. This unit resembles a USB with a small LCD display. The display allows you to see vital information and enter your pin to access your Bitcoin. Notably, the Nano S supports over 1100 different cryptocurrencies, including all ERC-20 tokens. Currently, there are over 180,000 ERC tokens in use, so this feature provides a lot of value to the unit.
For a premium Ledger product there is also the Nano X.
Keep Your Crypto Safe
If you are the type of investor that plans to save up large amounts of crypto, or you are just security-minded, a hardware wallet is the smart choice for you. However, you will need to remain vigilant. In the world of peer-to-peer blockchain transactions, there are no refunds or canceled payments. If someone steals your Bitcoins because you didn’t keep it safe, there is little recourse for you to follow. Crucially, keeping your crypto safe is your responsibility.
Bitcoin Futures Trading Strategies
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.
Uses for 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.
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.
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 Guess Work
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 Currently in Use
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.
The Main 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.
Trading Bitcoin Futures – Not a Task for the Inexperienced
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.
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