AI Trading

Trading strategies that involve futures might wonder whether they are applicable to cryptocurrency. As it turns out, Bitcoin futures contracts are available to investors, allowing them to speculate on and benefit from the future price of the cryptocurrency.

If you are a novice at investing in more traditional forms of cryptocurrency, whether or not you are familiar with it, you may be able to benefit from some expert professional advice. I recommend talking with a financial advisor before deciding how to proceed in order to determine the best course of action to take.

Investing in cryptographic currencies such as Bitcoin and Tokens provides investors with a way to hold coins and tokens in futures contracts. In order to be a responsible and safe trader, traders need to have an in-depth understanding of this product. Although futures are more difficult to use, they still provide the ability to hedge your position and short the market in order to profit from downturns.

What are Bitcoin futures?

Futures contracts for bitcoins are financial derivatives that are similar to futures contracts for other commodities. By agreeing to buy or sell BTC at a specific price on a particular date, you can buy or sell a fixed amount of Bitcoin.

AI Trading

The market price, which is the price at expiration, will be above the forward price if you go long (agree to purchase) on a Bitcoin futures contract. From the spot price and other variables, the considerable cost is estimated to be the fair value of an asset. More about this will be covered later.

Shorting a position when the market price is below the forward price will result in a loss of money and profits. To recoup them, the trader must purchase the asset at a later date.

Bitcoin Futures Exchanges

Cash settlement contracts are offered on the Chicago Mercantile Exchange (CME), meaning investors receive cash instead of Bitcoin after the agreement. Founded in December 2017, CME launched its platform in January 2018. To contribute to setting professional standards for trading, Crypto Facilities Ltd. (CF) created the Bitcoin Real Time Index (BRTI) and the index rate (which are both monitored by the commission).

CME provides a USD reference rate for its bitcoin futures contract, BTC, based on which cash settlements are made. The USD price of one bitcoin is determined every day by the bitcoin reference rate (BRR), and this rate is a reference rate for the bitcoin price over 24 hours.

Investing on the exchange is available from 5 p.m. to 4 p.m. CST Sunday through Friday. BRR index has a value five times greater than one bitcoin futures contract. Therefore, the tick movement of one bitcoin futures contract is worth $25. Investors can settle their futures contracts at the expiry date or roll the contract forward for an extended period.

Commodity Futures Trading Commission (CFTC) regulates all aspects of bitcoin futures trading, including clearing and settlement. The CFTC is the sole regulatory agency tasked with overseeing exchange-traded Bitcoin futures. Nevertheless, investors should keep in mind that regulations vary based on their country.

In addition to these exchanges, three other deals offer physical delivery of Bitcoin futures contracts, including Bakkt and Intercontinental Exchange.

Rather than trading for a different asset, physical delivery refers to delivering the actual investment on the specified date instead of trading it for an additional asset.

Why do people use Bitcoin futures?

Buying and selling Bitcoin futures offers buyers and sellers the chance to lock in future prices. Hedging is the process of locking in future costs. Commodities futures have historically been used as a hedging strategy by producers who need stable profits to cover their expenses.

Futures are also a means of speculating for traders since they are a form of contract. A person can place bets on the market’s condition by taking long or short positions, depending on which state the market is in. There is still plenty of opportunities to profit out of a quick post even in the midst of a bear market. In the following paragraphs, you will learn about the advantages of taking the temporary place, including arbitrage opportunities, as well as ways to enhance your trading skills.

Benefits of trading Bitcoin futures

  • Hedging

Despite appearing more useful in physical commodity markets, hedging is also valuable for crypto markets.

In the same way as farmers, bitcoin miners are concerned with fair pricing for their products. To hedge, it is essential to use both spot and futures markets. Let’s explore this in more detail.

  • The futures contract

You can protect yourself by shorting bitcoin futures contracts if you own bitcoins. The miner must settle with the other party when the futures contract matures.

A miner must pay the difference between the futures price of Bitcoin (mark price) and the forward price of the contract if the futures price is higher.

By taking a long position, the other party will pay the difference if the marked price is lower than the forward price.

  • The spot market

The miner sells their Bitcoin on the spot market on the day of the futures contract’s maturity. The sale will give them the marked price in the futures market, which will be close to the market price.

It follows that profits and losses made on the futures market will be effectively cancelled out by the spot market. The miner receives a hedged price once the two figures are combined. I will illustrate this with some numbers using both steps together.

  • Combining the futures contract and spot trade

As a result of the shorting in the first three months, a miner shorts one bitcoin at $35,000. If the marked price is $40,000 when the contract matures, they will lose $5,000 due to the settlement paid to the long side of the contract. Moreover, the miner is simultaneously offering to sell one bitcoin, making the spot price $40,000. This covers the miner’s $5,000 loss, leaving $35,000 for the hedged price, which covers the miner’s loss.

  • Leverage and margin

The ability to trade on margin is attractive to investors. By allowing you to borrow funds and enter more prominent positions than you could otherwise afford, margin enables you to borrow funds. The larger your posts, the greater your profits because small price movements are magnified. If the market moves against you, you might lose a significant chunk of your initial capital.

Leverage can be shown as a multiplier or a percentage in an exchange. As an example, 10x equals tenfolding your capital, and therefore, 5K with a 10X leverage gives you 50K to invest. It is known as margin when you use leverage to trade your stock, as it uses your initial capital to cover your losses in the event of a loss. Let’s take a look at an example:

At the end of the quarter, you purchase two Bitcoin futures contracts worth $30,000. This is being traded with a 20x leverage, so you will only need to provide $3,000 to trade this. Your margin of $3,000 serves as your protection against losing money, and the exchange will take the loss on this basis. The business will liquidate the position if it fails more than that amount. The leverage multiple would be 100 divided by 100 (margin percentage). In this case, 10% is ten times, 5% is twenty times, and 1% is one hundred times. You can use this percentage to determine how much a contract’s price could decline before liquidation.

  • Portfolio Diversification

It is possible to diversify your portfolio further using Bitcoin futures, and you can use new trading strategies.  Creating a well-balanced portfolio across various coins and products is highly recommended. Rather than just HODL, futures allow you to engage in several trading strategies. As well as higher-risk arbitrage strategies with lower profit margins, you can lower the overall risk of your portfolio with lower-risk arbitrage strategies. We will discuss these strategies in further depth.

Different futures contracts have other characteristics. Futures products offered by other exchanges differ in their mechanisms, expirations, pricing, and fees. The main difference in Binance’s current offerings is the expiration date and funding types.

  • Expiration date

To date, we have only discussed futures with an expiration date which is clearly defined. You can also find monthly, and semi-annual maturity dates (expiration dates) on other exchanges and Binance has quarterly futures on its futures exchange. By just looking at the name of a contract, you can check the expiration date very quickly.

A cryptocurrency futures contract on the Binance exchange has the same calendar cycle as the cryptocurrency’s quarterly contracts: March, June, September, and December. On 25 September 2021, 8:00:00 UTC, there will be an expiration date for the BTCUSD Quarterly 0925 contract.

One of the most popular options for trading futures is trading perpetual contracts without an expiration date. The quarterly futures are subject to a funding fee, and profits and losses are handled differently.

  • Funding fee

You must maintain a margin to protect yourself from potential losses when you trade a Bitcoin quarterly future on Binance. Unless you are liquidated or the contract matures, you will only be responsible for this loss. Those who own perpetual futures contracts also have to pay or receive funding fees every eight hours.

Traders pay each other funding fees. Using these rates for perpetual contracts prevents divergence between forward and mark prices for perpetual bitcoins in the future. As we know by now, mark-ups are used to avoid unfair liquidations that may occur when a market is highly volatile. Mark-ups are similar to spot prices for Bitcoin, but they prevent unfair liquidations.

In spot trading, a trade may temporarily lift the price by thousands of dollars. However, this volatility doesn’t reflect the accurate market price and could liquidate futures positions. As you can see below, red indicates the funding rate, and blue shows the time when the payment is due.

With favorable funding rates, the perpetual contract price may be higher than the mark if funding rates are favorable. Traders who are long in a futures contract must pay the funding fee to traders who are short in a futures contract when the market is bullish and the funding rate is favorable. Considering the nature of perpetual agreements, the marked price must be lower than the contract’s price in order to calculate a negative funding rate. In other words, the long position is paid by the short position.

How to start trading Bitcoin futures contracts?

Set up an account on Binance and put some money into it if you want to trade Bitcoin futures. The following are all the steps you’ll need to get your first bitcoin futures contract:

  1. Activate two-factor authentication (two-factor authentication) through your Binance account. Check that 2FA is activated on your futures account if you already have one.
  2. Invest in Bitcoin (BUSD), Tether (USDT), or any other cryptocurrency that is supported by this exchange. Make the purchase using a debit or credit card to make the process easy.
  3. Select the contract type you want to buy from the Bitcoin futures overview. You can choose between COIN-M and USDS-M futures. Decide if the ends are perpetual or if they will mature.
  4. Depending on your comfort level, choose how much leverage to employ. You are more likely to lose your investment when price fluctuations are small, the higher the leverage.
  5. When opening your Bitcoin futures position, you must select an order type and an amount, then click “Buy/Long” or “Sell/Short.”.

Arbitrage strategies involving bitcoin futures

We have covered the basics in our guide to long and short trades, but it’s not the end. Arbitrage strategies for futures trading are similar to those applied to forex markets. In traditional markets, traders employ these techniques, which are also applicable to crypto.

  • Inter-exchange arbitrage

There may be an arbitrage opportunity if cryptocurrency exchanges price their futures contracts differently. You can profit from the difference if you purchase one agreement on one sale and sell another on another.

For instance, suppose a BTCUSD Quarterly 0925 on Binance is $20 cheaper than the price on another exchange.

To arbitrage the difference between Binance and the more costly exchange, you would purchase a contract there and sell one on Binance. Automated trading bots, however, can cause contract prices to fluctuate rapidly. Be fast when making your trades because differentials can disappear while you are doing them. You should also consider fees when calculating your profit.

  • Cash-and-carry arbitrage

Futures arbitrage, also known as cash-and-carry arbitrage, is completely market-neutral. Market neutral positions are positions in which one buys and sells an asset simultaneously in the same amount. An investor, in this case, is buying and selling an equal number of futures contracts that differ only in price from each other. With crypto futures, cash-and-carry arbitrage has a significantly higher profit margin than traditional commodity futures.

Compared to older markets, there is much less trading efficiency, and arbitrage opportunities are much more prevalent. The key to successfully implementing this strategy is finding the point where the spot price of BTC is lower than the futures price of BTC.

It is important to understand that in order to cover your short position you will have to short the futures contract in addition to covering it on the spot market. You can arbitrage the differential you initially found when the contract matures and settle quickly with your bitcoin purchase.

What is the initial reason for this opportunity to present itself? Many people who believe that the price of BTC will rise in the future but do not have the money to buy it now are willing to pay a higher futures price. You believe Bitcoin will be worth $50,000 in three months, but it is currently at $35,000.

There is no money in your account, but you will have it in three months. If you want to enter the extended position for delivery in three months, you can do so at $37,000 for a slight premium. For a fee, a cash-and-carry arbitrageur holds the BTC for you.

Closing Thoughts

A Bitcoin future is a derivative that has been tested and proven in traditional finance and is now available in the cryptocurrency world. As cryptocurrency futures markets have become extremely popular, it is now possible to find trading platforms with high liquidity and trading volume and high trading volume. In spite of that, trading Bitcoin futures markets involves a high level of financial risk, so before you start trading, make sure you have a clear understanding of how the futures trading markets work.

AI Trading produces top quality content for crypto companies. We provide brand exposure for hundreds of companies. All of our clients appreciate our services. If you have any questions you may contact us. Cryptocurrencies and Digital tokens are highly volatile, conduct your own research before making any investment decisions. Some of the posts on this website are guest posts or paid posts that are not written by our authors and the views expressed in them do not reflect the views of this website. Herald Sheets is not responsible for the content, accuracy, quality, advertising, products or any other content posted on the site. Read full terms and conditions / disclaimer.

Nathan Ferguson

By Nathan Ferguson

Nathan Ferguson is a talented crypto analyst and writer at Herald Sheets, dedicated to delivering comprehensive news and insights on the ever-evolving digital currency landscape. With a strong background in finance and technology, Nathan's expertise shines through in his well-researched articles and thought-provoking analysis. He holds a degree in Economics from the University of Chicago, and his passion for cryptocurrency drives him to stay up-to-date with the latest industry trends and developments.