Many traders are drawn to the market due to its rapid price movements and opportunity for profit. When it comes to Bitcoin analysis, the sheer unpredictability of the market can be daunting. Bitcoin Futures trading could be your solution if you're looking for a way to make sense of the volatility and bring more consistency to your Bitcoin trading strategy. In this guide, we'll explore the ins and outs of Bitcoin Futures trading and Bitcoin indicators to help you get started confidently.
Bitcoin Magazine Pro's Bitcoin analysis is valuable for helping readers achieve their objectives. For example, they can confidently trade Bitcoin Futures with expert-backed strategies that minimize risks and maximize profits, leading to consistent success in the volatile market.
What are Bitcoin Futures Contracts & How They Work
Bitcoin Futures contracts are legal agreements to buy or sell a certain amount of Bitcoin at a specified price at a specific time. Much like futures for commodities or stocks, they allow you to hedge against price fluctuations by locking in a price today for a transaction that’ll occur later.
How Do Bitcoin Futures Contracts Work?
Bitcoin Futures contracts operate much like futures contracts for other assets. In short, two parties enter a bet on the future price of Bitcoin. The Buyer agrees to purchase Bitcoin at a predetermined price on a future date. The Seller agrees to sell Bitcoin under the same conditions. When the contract expires, both parties can settle in cash or Bitcoin. Traders can take a long position (betting prices will rise) or a short position (betting prices will fall).
Specific Details on Bitcoin Futures Contracts
Bitcoin Futures have unique characteristics:
- Expiration Date: The date when the contract must be fulfilled.
- Contract Unit: The amount of Bitcoin per contract, often quoted in dollars.
- Price Limits: These can halt trading if the price becomes too volatile over a short period.
- Margin Requirements: The minimum amount of funds required to trade and maintain a position.
When investors buy and sell Bitcoin Futures contracts, they speculate about BTC’s future price. In essence, two parties make a bet:
- One believes the BTC will go up in the future
- Another bet BTC will fall in price
The person who gets it wrong pays the other party a cash settlement.
Who Regulates Bitcoin Futures Contracts?
Various futures contracts exist for:
- Currencies
- Stock indexes
- Commodities
The Commodity Futures Trading Commission (CTFC) regulates the overall futures market. The agency considers Bitcoin a commodity, so Bitcoin Futures are commodity futures.
Where Can You Trade Bitcoin Futures Contracts?
Bitcoin Futures contracts trade on the Chicago Mercantile Exchange (CME), which introduces new monthly contracts for cash settlement. The CME offers monthly BTC futures contracts for six months and additional quarterly agreements for each of the four upcoming quarters.
CME Group also offers an additional December contract if only one is listed. Each futures contract represents 5 BTC. Monthly futures contracts expire on the last Friday of each month.
What Are Front-Month Bitcoin Futures?
Bitcoin’s short-term futures contracts are the contracts with the nearest expiration date. They’re also called front-month futures contracts. Front-month futures contracts typically trade closest to the spot price of Bitcoin, and they can trade either above or below the spot price, depending on whether the market believes Bitcoin prices are headed higher or lower in the near term. The price of Bitcoin is considered to be the BTC spot price.
Front-month futures contracts typically trade higher than the current spot price, a condition known as contango. Contango represents market expectations that asset prices are headed higher in the near term. Meanwhile, backwardation indicates that the market expects asset prices to trade lower soon.
Example of How Bitcoin Futures Contracts Work
For example, assume it’s January, and the six consecutive contract months are:
- January
- February
- March
- April
- May
- June
That year’s December contract plus next year’s December contract will also be listed. When one contract expires, the next contract to complete the six-month lineup is added. As one contract expires, the next contract to complete the six-month lineup is added. When the December contract expires, the June contract becomes active, and the December contract is for the next year. Six consecutive monthly contracts and only two December contracts are listed at any time. This process continues throughout each year.
CME’s Bitcoin Friday Futures Launch with 31K Contracts on Day One
Bitcoin fell from nearly $27,000 to about $24,600 following the launch of the Bitcoin Friday Futures (BFF) product on Sept. 29, 2023. The launch coincided with a broader market decline, which saw the total market capitalization drop by about $30 billion to $1.03 trillion over the same period, according to CoinMarketCap data.
Bitcoin Friday Futures: What are They and How Do They Work?
Bitcoin Friday futures (ticker: BFF) are weekly, USD-settled contracts that offer a more precise way to gain bitcoin exposure and manage risk related to such exposure. Each contract represents 1/50 (0.02) of a bitcoin, ensuring capital efficiency and accessibility.
These shorter-dated contracts expire to the CME CF Bitcoin Reference Rate New York Variant (BRRNY) every Friday at 4:00 p.m. New York time and may more closely track the spot price of bitcoin.
Who is Bitcoin Friday Futures for?
If you want long-term commitment, MBT and BTC expire monthly with longer-dated listings. If you anticipate short-dated market movements and seek to mitigate weekend risk, BFF is your contract.
Given the shorter duration and smaller contract, Bitcoin Friday futures will offer both active individual traders and institutional investors a new, flexible, innovative, capital-efficient, and more granular way to gain exposure to bitcoin or even test new strategies. All while effectively managing existing product portfolios and capturing new trading strategies. And, because they’re trading on a platform regulated by the CFTC, there’s an added layer of transparency and security.
How Do Bitcoin Friday Futures Reduce Upfront Capital Commitment for Investors?
BFF allows for the most precise trading with the smallest required capital. Larger exposure can be gained with MBT or BTC. Even with some recent market turbulence, the price of bitcoin has risen close to 50% YTD on top of more than doubling in 2023. At these elevated price levels, our existing suite of products, such as BTC (5 bitcoin multiplier) and MBT (0.10 bitcoin multiplier), can become inaccessible for some market participants.
BFF, our smallest Bitcoin Futures yet, offers exposure to 0.02 bitcoin, currently valued at around $1,200, reducing the financial commitment required to get bitcoin exposure. However, unlike spot purchases where the position needs to be fully funded upfront, futures investors would only be required to deposit a percentage of the contract’s value or margin to secure the position. As the table below demonstrates, at current market levels, investors would need to post around $300 in margin to gain the full exposure.
When Do Bitcoin Friday Futures Settle?
These Weekly futures contracts will settle every Friday at 4:00 p.m. New York time to the Bitcoin Reference Rate New York Variant (BRRNY). The BRRNY is the benchmark used by six out of the 10 new spot bitcoin exchange-traded funds (ETFs) that hold bitcoin directly.
Since the launch of these popular ETFs, volume for BTC and MBT has increased in the hour leading to 4:00 p.m. New York time, where more than 20% of a day’s notional volume is transacted. The new BFF contract will allow traders to benefit from growing liquidity and capture market moves more efficiently during U.S. hours.
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Bitcoin’s Stumble Tied to Futures Market Shake-up
The futures market influences Bitcoin's price. Futures markets let traders bet on the Future price of an asset, this trading can move markets. Recent events in the futures market led to Bitcoin’s steep price decline to start of the week. The largest Bitcoin fell over 4.40% in the past 24 hours amid a “long squeeze” in the perpetual futures market, according to the Brave New Coin’s Bitcoin Liquid Index. At the time of writing, Bitcoin is trading at $62,408, marking a slight 0.30% gain in the last week.
This decline in Bitcoin’s value aligns with a wave of caution sweeping through global equity markets. Experts are raising concerns due to expectations of another interest rate hike from the Bank of Japan (BoJ), which has historically had ripple effects across financial markets.
Long Squeeze Exacerbates Market Downturn
“Bitcoin perpetual futures market data shows that there was a long squeeze in recent hours, as long liquidations spiked,” CryptoQuant Head of Research Julio Moreno told The Block. A long squeeze occurs when the price of an asset declines, forcing traders with leveraged long positions to either sell or face liquidation to meet margin requirements, thereby intensifying pressure of sale.
This intensified selling can further drive down prices, triggering additional margin calls and forced liquidations, amplifying the downward momentum. In the past 24 hours, 67,689 traders have been liquidated, resulting in total liquidations across centralized exchanges amounting to $188.38 million, according to data from Coinglass. Bitcoin led the market in these liquidations, with nearly $48.49 million wiped out during this period. Notably, over $40 million of these Bitcoin liquidations were attributed to long positions, highlighting the impact of the long squeeze on bullish traders.
Open Interest Reaches Critical Levels
Analysts pointed out increasing speculation in the Futures market as open interest; the total value of outstanding contracts reached approximately $19.1 billion. They noted that since March 2024, open interest has exceeded $18.0 billion only six times, with each instance followed by a price decline.
The futures market shows signs of overheating, with open interest around $19.1 billion. Since March 2024, it has surpassed $18.0 billion six times, each resulting in a price drop. This marks the seventh occurrence, the analysts noted. This pattern suggests a consistent correlation between high open interest levels and subsequent price corrections in the Bitcoin market.
BoJ’s Monetary Policy Sparks Global Caution
The macroeconomic environment is also contributing to the current market dynamics. Japan’s ruling party selected Shigeru Ishiba as its next prime minister, a decision that could signal a shift in the country’s monetary policy. Ishiba is known to support further interest rate hikes by the BoJ, a stance that aligns with that of the central bank’s governor, Kazuo Ueda.
The anticipation of possible future rate hikes has instilled caution in global stock markets, dampening the recent optimism that had emerged following China’s latest economic stimulus measures and the U.S. Federal Reserve’s rate cut on September 18.
The Impact of Yen Carry Trade Unwind on Bitcoin and Global Markets
Investors are particularly wary of a repeat of the yen carry trade unwind that occurred in late July. This event caused panic in financial markets and led to Bitcoin’s rapid plunge from $70,000 to below $50,000 within days. The yen carry trade involves borrowing yen at low-interest rates to invest in higher-yielding assets, and its unwinding can have significant market repercussions.
Ishiba’s appointment has led to a renewed appreciation of the yen, but Japan’s Nikkei 225 Index dropped 4.8%, marking its sharpest decline in eight weeks. This downturn in the Japanese stock market has had a ripple effect on global equities, contributing to increased market volatility.
Macroeconomics Fuel Bitcoin Volatility
The S&P 500 and Dow Jones Industrial Average edged lower after the Dow had reached a record high on Friday. China’s Shanghai Composite surged over 8%, its biggest jump since 2008, following Beijing’s new stimulus measures to bolster the economy.
The contrasting movements in global markets underscore the interconnectedness of economic policies and investor sentiment. While China’s aggressive stimulus has boosted its stock market, concerns over tightening monetary policies in Japan and potential impacts on currency valuations are causing jitters elsewhere.
Macroeconomic Factors and Futures Market Dynamics Driving Bitcoin Volatility
The market's heightened volatility reminds us of the macroeconomic factors' influence. A market analyst commented that combining leveraged positions in the futures market and global economic uncertainties creates a perfect storm for Bitcoin volatility.
Looking ahead, traders and investors will closely monitor central bank policies and their implications for traditional and digital assets. The recurring pattern of high open interest leading to price declines suggests caution may be warranted when the futures market overheats.
Central Bank Policies and Their Impact on Bitcoin's Price Trajectory
The potential for further interest rate hikes by the BoJ could continue to impact global financial markets. As central banks navigate the delicate balance between stimulating growth and controlling inflation, their decisions will likely have far-reaching effects. For Bitcoin, a convergence of factors, including market sentiment, futures market dynamics, and macroeconomic policies, contributes to its current price trajectory. Whether this marks the beginning of a sustained downturn or a temporary correction remains to be seen.
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Step-By-Step Guide on Bitcoin Futures Trading
1. Understand the Basics of Bitcoin Futures Trading
Futures contracts trade differently than stocks, funds and fixed income instruments, so if you’ve never traded futures, learn how they trade and the requirements for traders. Here are some key points to keep in mind about trading Bitcoin Futures:
- Bitcoin Futures have high margin requirements at CME, with a maintenance margin requirement of 37% and an initial margin for hedgers at 100% of the maintenance margin. Speculators have a maintenance margin of 110%. An FCM, or futures commission merchant, may have higher margin requirements depending on the market and the trader.
- The CME Bitcoin Futures contract (BTC) specifications are for 5 bitcoins as defined by the CME Crypto Facilities Ltd. (CF) BTC Reference Rate (BRR). This aggregates activity in BTC trading across major bitcoin spot exchanges between 3 p.m. and 4 p.m. GMT.
- The minimum fluctuation for a futures contract is $25 per contract and $5 for calendar spreads.
- Trading times for Bitcoin Futures, which can be found on the CME, the CME Globex, and the CME ClearPort trading platforms, are from 5 p.m. until 4 p.m. CST, Sunday through Friday. An hour of inactivity between 4 p.m. and 5 p.m. gives a clear opening and closing quote for the contracts, unlike bitcoin, which trades 24/7.
- The listing cycle for the BTC futures contract is the March quarterly cycle, consisting of March, June, September and December, plus the nearest two serial months not in the March quarterly cycle. Serial months are months in which a futures trade that isn’t in the quarterly cycle can be made. The last day of trading is the last Friday of the contract month. Trading in futures set to expire terminates at 4 p.m. GMT when that Friday comes around.
- Other considerations include how closely Futures prices track spot prices, the liquidity in the market, and the positioning of other traders and market makers.
2. Choose a Futures Exchange and Broker
To trade Bitcoin Futures, you'll need to use a futures exchange that offers these contracts. Some of the most popular exchanges for trading Bitcoin Futures include:
- The Chicago Mercantile Exchange (CME)
- Chicago Board Options Exchange (CBOE)
How to trade Bitcoin Futures is as important as where you trade, so make sure you pick the right broker. A reputable futures broker is usually a member of the National Futures Association (NFA) and submit to regulatory oversight by the CFTC. To start trading futures, you must first open an account with a registered futures broker where your account can be maintained and your trades guaranteed. Futures brokers are generally known as either FCMs or introducing brokers (IBs).
3. Build a Trade Plan
Developing and implementing a trading plan could be the most important thing you do to further your trading career. Base your trading plan on careful analysis of the market you plan to trade in. As you build your trading plan, consider what your objectives are for each trade, the amount of risk you plan to take on a trade and how much risk is acceptable for each trade.
Other factors include the technical and fundamental analysis indicators you plan to use to generate buy and sell signals, the types of orders you plan to use and the way you plan to monitor the market and price developments. Money management and position sizing must also be considered when trading in the volatile Bitcoin Futures market. If you have difficulty developing your own plan, you can either follow what other traders do or use someone else’s trading plan.
4. Practice with a Demo Account
The broker you select should provide you with a virtual or demo account where you can test your trading plan and get a feel for trading in real time. You really don’t know how to trade Bitcoin Futures until you put your plan to the test.
Trading in a demo account or trading simulator allows you to practice without committing any funds and address any issues that may have arisen with your trading plan. Once you’ve developed sufficient confidence in your methods, you can then fund your trading account and begin to trade.
Building Confidence in Trading Through Small Trades and Demo Accounts
Making small trades at the beginning could save you a lot of money and stress. After you’ve built up your account with small trades, you can increase your position size with more confidence.
A broker’s demo account will also give you insight into the broker’s services, which could help you in your final selection of a broker. If you have a trading plan, you can open several demo accounts and test your plan with different brokers.
5. Go Live and Start Trading Bitcoin Futures
Once you’ve selected a broker and have tested it in a demo account, add funds to your account and start trading Bitcoin Futures in a live account. Keep in mind that putting real money on the line may make a difference to the way you trade, so make sure you take that into consideration when you begin trading.
Trading futures may be more capital intensive and require significantly more money than trading spot currencies, so make sure you have enough trading capital to meet margin requirements.
Bitcoin Analytics Tools
Bitcoin Magazine Pro offers comprehensive analytics tools to help investors and enthusiasts better understand Bitcoin through data. The platform provides a wide range of free, regularly updated Bitcoin charts, each accompanied by detailed explanations to make complex information accessible.
For those looking to dive deeper, paid tiers offer features like chart alerts, exclusive indicators, and in-depth market reports.
Informed Decision Making
Whether you're a curious Bitcoin investor wanting to grasp the factors influencing Bitcoin's price or an analyst eager to expand your knowledge, Bitcoin Magazine Pro aims to provide clarity and insights to support more informed decision-making in the Bitcoin space.
Save 30% on Bitcoin Magazine Pro's Bitcoin analysis tool today when you sign up for our annual plan!
What are the Pros & Cons of Trading Bitcoin Futures?
The Upsides of Trading Bitcoin Futures
Trading Bitcoin Futures offers a range of benefits for investors looking to tap into the potential of the Bitcoin market. Here are some of the advantages:
Speculation on Price Movements
Trading Bitcoin Futures allows traders to speculate on Bitcoin's price movements without owning the asset, potentially profiting from rising and falling prices.
Leverage and Margin Trading
Bitcoin Futures trading allows traders to trade on margin, borrowing funds to increase position size for amplified profits and losses. Experienced traders can utilize leverage to maximize returns.
Risk Management
It allows you to use risk management strategies, such as stop-loss orders and hedging with futures contracts, to protect investments and limit potential losses from price fluctuations.
Liquidity and Market Access
Bitcoin Futures trading occurs on regulated exchanges, offering traders a liquid market with transparent pricing. It allows easy entry and exit of positions without needing a counterparty, and investors can access the market without holding physical Bitcoin.
Diversification
This allows investors to diversify their portfolios and gain exposure to the market without investing directly in Bitcoin, allowing for risk spreading and potentially reducing overall portfolio volatility.
What are the Risks of Trading Bitcoin Futures?
While trading Bitcoin Futures can provide opportunities for profit, it is important for investors to
be aware of the risks involved.
Price Volatility
Bitcoin is known for its price volatility, often magnified in futures trading. Prices can fluctuate dramatically quickly, leading to significant gains or losses for investors.
Leverage
Bitcoin Futures allow traders to control a larger position with less capital through margin trading. However, this also increases the risk of potential losses and margin calls if the market moves against them.
Regulatory Risks
Bitcoin Futures are still a relatively new financial product subject to regulatory scrutiny. Changes in regulations or government intervention could impact the trading of Bitcoin Futures.
Counterparty Risk
When trading Bitcoin Futures, investors face counterparty risk, which occurs when the other party in the trade may not fulfill its obligations, leading to financial loss.
Market Manipulation
The Digital currency market is vulnerable to manipulation, including pump-and-dump schemes and price manipulation by whales, which can also occur in the futures market.
Liquidity Risk
Bitcoin Futures markets may need more liquidity, which would make it difficult for investors to find buyers or sellers at desired prices and affect their profitability.
Are Bitcoin Futures a Good Investment?
Several factors determine whether Bitcoin Futures fit your trading style and goals. Consider your outlook on Bitcoin and its short-term price movements. If you believe Bitcoin will experience high volatility but its price will increase or decrease, Bitcoin Futures could present an opportunity to profit from the short-term price swings. Consider your risk tolerance.
Futures trading can lead to substantial losses, especially if the market moves against your position. Ensure you’re comfortable with the potential for rapid losses and can manage your emotions during trading. Assess your experience with futures trading. If you’re new to trading or have little experience with Bitcoin Futures, consider starting with a practice account before using real money.
Assessing the Role of Bitcoin Futures Volatility
Bitcoin Futures volatility can affect trading in various ways. If you’re an experienced trader, you can use Bitcoin’s volatility to your advantage. As a highly speculative asset, Bitcoin prices tend to swing dramatically. This creates opportunities for traders to profit from Bitcoin Futures by going long or short based on accurate predictions of Bitcoin’s short-term price movements.
As a trader, you also face the risk that volatility could adversely affect your position. While you can stand to make substantial gains if you can predict the price movements correctly, an opposing market move could lead to rapid losses.
The Importance of Strategy in Bitcoin Futures Trading
Like many trading activities, Bitcoin Futures trading can be risky and unsuitable for everyone. Assessing your risk tolerance, developing a strategy, and practicing proper risk management techniques can help mitigate the dangers of futures trading.
A sound strategy can help you identify when to enter and exit trades to maximize your profit potential and minimize losses. In addition, you can use techniques like hedging to offset risks. Remember that futures trading is based on speculation; any position can lead to rapid losses.
Bitcoin Futures vs. Bitcoin Options
Bitcoin Futures and Options: Understanding the Basics
Bitcoin Futures and options are both derivatives contracts. Traders can use both to speculate on the price of Bitcoin, but they differ significantly in terms of their structure and potential outcomes.
While Bitcoin Futures contracts obligate traders to buy or sell Bitcoin at a predetermined price and date in the future, options give traders the right to do so. In other words, futures contracts are binding, while options provide more flexibility for the trader.
Comparing the Key Features of Bitcoin Futures and Options
The table below summarizes the main differences between Bitcoin Futures and options:
|
Aspect |
Differences |
|
Potential for losses |
With Bitcoin Futures, traders can lose more than their initial investment if the market moves against them. This is due to the high leverage involved in futures trading. Options have a limited risk as traders can only lose the premium paid for the contract. |
|
Expiration date |
Futures contracts have a set expiration date, while options have an expiration period. This means traders must exercise their options before the expiration date, or they will expire worthless. This adds an extra layer of complexity to options trading, requiring more active management. |
|
Financial implications |
Bitcoin Futures contracts involve margin requirements, where traders must deposit a percentage of the contract’s value upfront. This allows for high leverage but also means traders can lose more than their initial investment. Options require a premium payment upfront, which is the maximum potential loss for the trader. |
|
Preference for long or short positions |
Bitcoin options provide more flexibility for traders to take long or short positions, while futures contracts are generally used for hedging against price fluctuations. This means traders with a more directional outlook may prefer options, while those looking for risk management might lean towards futures. |
Bitcoin Analytics Tools
Bitcoin Magazine Pro offers comprehensive analytics tools to help investors and enthusiasts better understand Bitcoin through data. The platform provides a wide range of free, regularly updated Bitcoin charts, each accompanied by detailed explanations to make complex information accessible.
For those looking to dive deeper, paid tiers offer features like chart alerts, exclusive indicators, and in-depth market reports.
Informed Decision Making
Whether you're a curious Bitcoin investor wanting to grasp the factors influencing Bitcoin's price or an analyst eager to expand your knowledge, Bitcoin Magazine Pro aims to provide clarity and insights to support more informed decision-making in the Bitcoin space.
Save 30% on Bitcoin Magazine Pro's Bitcoin analysis tool today when you sign up for our annual plan!
Practical Bitcoin Futures Trading Strategies That Work
Going long is the most commonly employed strategy in the Bitcoin Futures market. If you think the price of Bitcoin will rise, you buy a futures contract, also known as going long. You can buy futures that expire soon, say in a month or two, or futures that expire far in the future, like a year or more. The timing of the future will also affect the price you pay for it.
Time Value of Futures Contracts
Learning about the time value of futures is a smart thing to do because sometimes it might be better to buy a future with four months until expiration instead of one with three or two months. If you’re right about the direction the Bitcoin price will take, you can sell the futures contract for a profit.
The Risks and Rewards of Leveraging
If you’re wrong about the direction the price will take, you’ll lose when you sell the future. The loss could be even greater than your initial investment when Bitcoin Futures contracts are purchased on margin. While leverage can increase profits dramatically, it can also increase losses dramatically.
Short Bitcoin Futures: How to Make Money When Prices Drop
While buying futures is easy enough for most, selling something you don’t already own, called going short, can confuse new traders. It’s easy enough to get past, though. You just have to remember that a futures contract is a commitment to buy or sell something in the future. When you sell a futures contract, it simply represents your commitment to sell the underlying asset, in this case, bitcoin, at a set price at a set time.
You don’t need to own the bitcoin when you sell the futures contract. You’ll never have to buy any bitcoin because you won’t be making delivery on the contract. Aside from the psychological roadblock associated with going short, selling a Bitcoin future is no harder than buying. If you believe the price will fall, you go short. You get to sell as easily as buying. If your analysis of the market is correct and the price of bitcoin falls, you earn a profit. You'll face a loss if the market moves against you.
Day Trading Bitcoin Futures: A Quick and Easy Way to Profit
The third Bitcoin Futures trading strategy, day trading, combines the previous two strategies. Day trading is popular among traders who get in and out of positions several times throughout the day to make a small profit on each trade.
Bitcoin is known for its volatility, and traders who close their futures positions at the end of each trading day know they will avoid any strong moves against them that could cause a massive loss. Learning to day trade isn’t difficult, but there is a learning curve.
Mastering the Psychological Aspects of Day Trading Bitcoin
One of the most important things to learn is the psychological aspect of this trading strategy. There will come a time when the trading day ends, and the bitcoin price is moving in your favor. You may be seeing the position erasing earlier losses, or you may see it adding to your gains.
Your impulse will be to keep the trade going because the price is trending in your favor. You will need to learn not to give in to that impulse. The primary rule of day trading is to close out all your positions at the end of the trading day. If you can’t follow that rule, you aren’t day trading.
Trading Bitcoin Futures on Margin: How to Amplify Profits While Taking on Extra Risk
Like CFDs, most Bitcoin Futures markets allow you to trade on margin. This will enable you to stake a lot more than you have available in your brokerage account. Here’s an example of how combining leverage with Bitcoin Futures works in practice:
- You are interested in trading a 1-month Bitcoin Futures contract with a strike price of $19,000. Bitcoin is currently priced at $18,500.
- You decide to go long as you think Bitcoin will be worth more than $19,000 when the contracts expire.
- You have $1,000 in your brokerage account and use the full amount at leverage of 50x. This means you are effectively trading Bitcoin Futures with $50,000 worth of capital.
Let’s see what happens if your trade goes to plan:
- You let the Bitcoin Futures expire.
- When they do, the digital currency is worth $19,900. This is 4.7% higher than the strike price of $19,000. On a stake of $1,000, you would have made $47.
- You applied leverage of 50x, so your total profit is $2,350 ($47 x 50x).
- Leveraged Bitcoin Futures trades won’t always go in your favor.
Applying this much leverage is extremely risky. You always stand the chance of having your trade liquidated.
Bitcoin Futures Arbitrage Strategies: Make Money Off Price Inefficiencies
We’ve covered the basics of long and short trading, but that’s not all you can do. Futures contracts have a long history of arbitrage strategies similar to those of forex markets. Traders use these techniques in traditional markets.
Inter-exchange arbitrage
There is an arbitration opportunity when different exchanges have differently priced futures contracts. You can profit from the difference by purchasing a contract on the cheaper exchange and selling another on the more expensive. For example, imagine that a BTCUSD Quarterly contract is $20 cheaper on one exchange than another.
You can arbitrage the difference by buying a contract on one exchange and selling it on the more expensive exchange. However, prices do change rapidly due to automated trading bots. You must be quick; any differential could disappear while making your trades. Consider any fees you might have to pay in your profit calculations.
Cash-and-carry arbitrage
Cash-and-carry arbitrage is nothing new in futures and is a market-neutral position. Market-neutral positions involve buying and selling an asset in equal amounts. In this case, a trader goes long and short on an equal number of identical futures contracts, apart from their price.
Bitcoin Futures offer a significantly higher profit margin for cash-and-carry arbitrage than traditional commodity futures. There’s much less trading efficiency than older markets and bigger arbitrage opportunities. To successfully use this strategy, you must find a point where the BTC spot price is lower than the futures price.
Exploring Cash-and-Carry Arbitrage in Bitcoin Trading
Simultaneously, enter into a short position with a futures contract and purchase the same bitcoin on the spot market to cover your short. When the contract reaches maturity, you can settle the brief with your purchased bitcoin and arbitrage the differential you initially found. So why does this opportunity occur in the first place?
People are willing to pay a higher future price if they don’t have the money to purchase BTC now, but they think the price will rise. Let’s say you think BTC will be worth $50,000 in three months, but it’s currently at $35,000. At the moment, you have no money but will do in three months. In this case, you could enter a long position for a slight premium at $37,000 for delivery in three months. The cash-and-carry arbitrageur is essentially holding the BTC for you for a fee.
Save 30% on Bitcoin Magazine Pro's Bitcoin Analysis Tool With Our Annual Plan
Bitcoin Magazine Pro offers comprehensive analytics tools to help investors and enthusiasts better understand Bitcoin through data. The platform provides a wide range of free, regularly updated Bitcoin charts, each accompanied by detailed explanations to make complex information accessible.
For those looking to go deeper, paid tiers offer features like:
- Chart alerts
- Exclusive indicators
- In-depth market reports
Whether you're a curious Bitcoin investor wanting to grasp the factors influencing Bitcoin's price or an analyst eager to expand your knowledge, Bitcoin Magazine Pro aims to provide clarity and insights to support more informed decision-making in the Bitcoin space.
Save 30% on Bitcoin Magazine Pro's Bitcoin analysis tool today when you sign up on our annual plan!
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