How to Trade Bitcoin Futures Contracts

Table Of Content

• Content

• Conclusion

• FAQ

• You May Also Like

• External Links

Futures contracts for bitcoin are a type of derivative product with similarities to more conventional futures contracts. On a specified date, two parties agree to buy or sell a predetermined amount of bitcoin at an agreed-upon price. Traders use them speculatively, but you can also use them to hedge. Miners that are concerned about keeping their operations afloat often turn to hedging as a means of doing so.

Futures are a fantastic instrument for hedging against market volatility, increasing profit potential, and diversifying one's investment portfolio. Investigate arbitrage if you're interested in delving into more complex futures trading tactics. When carried out properly, cash-and-carry arbitrage and inter-exchange arbitrage can provide some low-risk trading possibilities.

Introduction

Contracts for the future delivery of bitcoin provide investors with diversification from holding physical coins or tokens. As a more sophisticated product, they require a better understanding to be traded safely and ethically. Futures, however, are more complicated to use but allow investors to hedge against price drops and profit from market declines.

What are Bitcoin futures?

Futures contracts for bitcoin are a type of financial derivative. Forward contracts are agreements to acquire or sell bitcoin at a predetermined price (the "forward price") on a future date. You will make money on a Bitcoin futures contract if you "go long" (commit to purchase) if the mark price is higher than the forward price when the contract expires. An asset's fair value, or market price, is calculated using the spot price and other factors. Later in the article, we'll go into greater depth on this topic.

If the mark price at expiration is lower than the forward price, you will lose money and the short position will profit.A short position occurs when a trader sells an asset they’ve borrowed or owned while expecting the price to drop. The trader then purchases the asset at a later date to make a profit. Contracts can be settled in a variety of ways, including the physical transfer of assets or, more commonly, the payment of money.

Why do people invest in Bitcoin futures?

Bitcoin futures enable buyers and sellers to lock in prices at a future date. This procedure is called "hedging." Commodity producers rely on steady income to fund overhead; hence, futures are often employed as a form of risk management in the commodities markets.

Traders also use futures for speculating. You can wager on the future direction of the market by taking either a long or short position. Taking a short position can still be profitable in a bad market. Multiple arbitrage opportunities exist, and complex trading techniques can be implemented.

Benefits of Trading Bitcoin Futures

While hedging may seem more effective in real-world commodities markets, it does have a function in crypto too. Like farmers, Bitcoin miners must cover expenses before seeing a profit from their labour. In order to hedge, traders use both the futures and spot markets. Okay, so let's test this out and see if it really does work.

The futures contract

A bitcoin miner can take a short position in a futures contract to preserve their BTC holdings. When the futures contract matures, the miner will have to settle with the other party to the agreement.

The miner is responsible for compensating the other party if the markup price of bitcoin in the futures market is greater than the forward price in the contract. In the event that the forward price of the contract is lower than the mark price, the party holding the long position is obligated to compensate the miner for the difference.

The spot market

On the day of the futures contract’s maturation, the miner sells their BTC on the spot market. The proceeds of this sale will provide them with the current market price, which ought to be close to the markup price in the futures market.

However, the spot market trade will effectively erase any profits or losses achieved in the futures market. When these figures are added together, they provide the miner with the desired hedged price.To better illustrate, let's merge the two phases into one set of statistics.

Combining futures contracts and spot trading

One bitcoin worth $35,000 in three months is shorted by a miner. The loss in the settlement paid to the long position in the contract would be $5,000 if the mark price was $40,000 on the maturity date. The miner also sells one bitcoin at the current spot market price of $40,000 at the same time. When the miner's $5,000 loss is subtracted from the $40,000 he receives, the hedging price of $35,000 is reached.

Margin and leverage

Trading on margin is a popular option among investors. Using borrowed cash from the margin, traders can take on larger positions than they would otherwise be able to.Increased profits result from taking larger positions since even slight changes in the market's direction have a greater impact on a larger portfolio. However, if the market turns against your positions, you may have to quickly sell your initial investment.

Leverage is presented as a percentage or multiplier on an exchange. Ten times your investment would be a good example. For this reason, if you put up $5,000, you can effectively trade with $50,000. Margin is the initial investment used to offset potential losses in leveraged trading. Here's a case in point:

You commit $60,000 to two Bitcoin futures contracts for the upcoming quarter. You can trade this on your exchange with a leverage of 20:1, which means you need only deposit $3,000. The exchange will absorb any losses above this margin of $3,000; We will close your position if your losses exceed $3,000. Just divide 100 by the leverage multiple to get the margin percentage. It's easy to remember that 10% is 10X, 5% is 20X, and 1% is 100X. You can calculate how far the price can fall below the contract price before the contract is terminated using this percentage.

Portfolio Diversification

Bitcoin futures provide an additional avenue for portfolio diversification and the opportunity to try out novel trading tactics. A diversified portfolio of coins and goods is advised. Futures are appealing because of the many trading strategies you can employ, in addition to the HODLing strategy. You can lessen your portfolio's overall risk with lower-profit-margin arbitrage methods. We'll go into a little more detail about these tactics.

Are you prepared to try your hand at trading?

Bitcoin futures on Binance

A plethora of futures contracts exist, and they are not all the same. Futures products offered by various exchanges have various methods, expiration dates, prices, and fees. There are now a few choices available on Binance, which vary mostly in terms of their termination dates and funding.

Expires on:

Futures with a set date of expiration have been the only ones discussed so far. Although Binance's futures market only offers quarterly maturities, other markets provide monthly and semiannual maturities. The name of a contract might tell you when it is set to end.

Trading for bitcoin futures on the Binance exchange occurs quarterly, on the 3, 6, and 9 of each month. The final day to trade a BTCUSD Quarterly 0925 contract is September 25, 2021, at 08:00 UTC.

Trading futures contracts that never expire is another common strategy. In contrast to quarterly futures, losses and gains incur a funding cost.

Funding fee

You should always have enough margin to offset potential losses when trading Bitcoin quarterly futures on Binance. However, you won't have to pay for this loss until the contract expires or you go out of business. Every eight hours, participants in a perpetual futures contract must either pay or receive a financing charge.

Trading parties pay each other funding fees. Perpetual Bitcoin futures contracts' forward prices are kept from deviating from the mark price by means of these rates. The mark price is identical to the spot price of BTC, but it's meant to avoid unjust liquidations during times of extreme market volatility.

A single transaction on the spot market, for instance, can cause a temporary increase of several thousand dollars. Futures positions may be liquidated due to this volatility, but it isn't indicative of the true market value. Below, the funding rate and its due date are shown in red.

If the financing rate is greater than zero, then the price of the perpetual contract is higher than the markup price. When the financing rate is positive, as when the futures market is bullish, traders with long positions compensate for those with short positions.Prices for perpetual contracts go below the mark when the financing rate is negative. The cost of the long position here is borne by the shorts.

Futures trading on Binance can be done in two different ways: COIN-M futures use cryptocurrency as the margin, while USDS-M futures use BUSD/USDT. Although there are notable distinctions between the two, perpetual futures can be purchased for both types of contracts.

Your COIN-M futures margin account must be collateralized by the underlying asset of the contract. However, cross-collateralization is permitted while trading USDS-M futures. With this function, you can use the cryptocurrency held in your spot wallet as collateral to borrow USDT or BUSD at zero percent interest.

Miners that wish to protect themselves against price fluctuations in bitcoin often prefer COIN-M futures. Due to the crypto-based nature of the settlement, the conversion of Bitcoin into stablecoins is unnecessary.

How do I start trading Bitcoin futures contracts?

Create a Binance account and fund it with Bitcoin so that you may begin trading Bitcoin futures. Get your own Bitcoin futures contract by following these easy steps.

Make a Binance account and turn on two-factor authentication. In order to fund your futures account, existing account holders must turn on two-factor authentication.

The second step in futures trading is to acquire some Bitcoin, Tether (USDT), or another supported cryptocurrency. Using a debit or credit card to make the purchase is the most convenient option.

You can use your debit or credit card to buy cryptocurrency.

Once you have found the Bitcoin futures summary, you may choose the contract type you wish to invest in. Indicate whether the COIN-M or USD-M futures you're investing in will never expire or will expire at some point in the future.

Determine how much leverage you feel comfortable utilizing. To the right of the [Cross] button in the trading UI is where you'll want to enter your trade. Keep in mind that the more leverage you have, the more vulnerable you are to being liquidated by even small price shifts.

Leverage adjustment

Decide how much you want to invest in Bitcoin futures and what kind of order you want to use, then select [Buy/Long] or [Sell/Short].

Bitcoin futures arbitrage strategies

The fundamentals of both long and short trading have been discussed, but that's not all there is to it. Arbitrage techniques with futures contracts are quite similar to those used in the foreign exchange market. These strategies are used by traders on conventional markets and can be applied to crypto as well.

Arbitrage between exchanges

If two or more cryptocurrency exchanges provide futures contracts at differing prices, the parties involved might submit their disputes to arbitration. You can earn a profit on the price differential between two exchanges by buying a contract on the cheaper one and selling it on the more expensive one.

Think of it this way: A BTCUSD Quarterly 0925 on Binance is $20 less expensive than on another exchange. It is possible to profit from the price differential between two exchanges by using the arbitrage strategy of buying a contract on Binance and selling it on the more costly exchange. However, due to trading bots, price fluctuations can be rather quick. Any price difference could vanish while you're making your deals, so you'll need to act quickly. Make sure to include any potential transaction costs when estimating your earnings.

Profiting from price discrepancies through the use of cash and carry

Futures traders have long been familiar with the cash-and-carry arbitrage strategy because of its market-neutral nature. To take a market-neutral position, one must simultaneously buy and sell an asset in equal quantities. A trader in this situation will buy and sell the same number of futures contracts, regardless of price. Comparatively speaking, the cash-and-carry arbitrage opportunity set presented by crypto futures is substantially larger than that presented by commodities futures.

There’s substantially less trading efficiency compared to earlier markets and bigger arbitrage potential. Finding a time when the spot price of bitcoin is less than the futures price is crucial to the success of this tactic.

Now is the time to short Bitcoin futures and buy the same amount of bitcoin on the spot market to cover your short. At contract expiration, you'll be able to use the bitcoin you bought to cover your short position and profit from the arbitrage opportunity you identified.

The question then becomes why this chance exists. If you don't have the cash to buy bitcoin right now but anticipate the price will climb in the future, you may be willing to pay a higher futures price. Assume you believe Bitcoin's value will rise to $50,000 in the next three months, up from its current level of $35,000

You are currently cash-strapped but expect to be financially stable in three months. To enter a long position at a little premium, you could pay $37,000 and take delivery in three months. When you use a cash-and-carry arbitrageur, he or she essentially stores your bitcoins for you in exchange for a fee.

Conclusion

Trading in Bitcoin futures adapts a well-established derivative in conventional finance for use in the cryptocurrency market. The futures markets for cryptocurrencies are increasingly widely used, and investors have little trouble finding exchanges that offer high trading volume and liquidity. You should study the inner workings of futures trading before venturing into Bitcoin futures markets due to the huge financial risk involved.

FAQs

What about Bitcoin futures trading?

Chicago Mercantile Exchange (CME) bitcoin futures contracts are introduced monthly for cash settlement. Bitcoin futures contracts are available on the CME for the next six months on a monthly basis, plus the next four quarters.

Bitcoin futures contracts: how do they function?

Futures are a financial instrument that can be used as a derivative. Trading contracts that are governed by law and comprise an agreement to buy or sell an underlying asset at a predetermined price and on a certain date Bitcoin itself would serve as the underlying asset for bitcoin futures contracts.

How about a futures contract for bitcoin?

Bitcoin futures contracts are traded on the CME from Sunday evening (Central Time) until Friday afternoon (Central Time) (CT). One U.S. dollar per one bitcoin is the valuation used for a single BTC contract, which is five times the value of the BRR Index.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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External Links

• Cryptocurrency Futures Defined and How They Work on Exchanges

• How To Trade Bitcoin Futures

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