Bitcoin Futures Trading
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Bitcoin Futures Trading

Whilst there are only a few bitcoin futures platforms out there, they represent the best derivatives exchanges in the crypto market.  They are the cheapest, the exchanges are the most transparent, and the liquidity is now very high.  If you are going to trade derivatives, go with futures trading.

Published: August 15th, 2017 | Author: David Marc

In our previous article we examined bitcoin CFDs, which are a simple instrument for the trading of bitcoin (and other assets) with high leverages. Bitcoin Futures are a more mature instrument, and overcome many of the shortcomings of CFDs. Though perhaps a bit more complex, if you are interested in getting into derivatives, you must really take the time to get comfortable with futures.

Bitcoin Futures

There are a few very fundamental differences between bitcoin futures and CFDs that make futures, in our opinion, a distinctly superior trading instrument.

Bitcoin Futures are traded between market participants

Bitcoin futures are traded between market participants, which removes any theoretical conflict of interest between the trader and the exchange. Futures will ultimately expire and settle at a price determined by an index that is usually transparent and fairly sourced; prices are not set by the brokerage, which removes any potential for price manipulation.

Bitcoin Futures are Cheap to Trade

Commissions are extremely low; BitMex, who in our view sets the bar for bitcoin futures trading, waives fees entirely for makers or even offers a fee rebate. Buy a 10 bitcoin futures contract as a taker, for instance, and you would pay .0075 bitcoin. The same position would cost you at least double at any CFD brokerage.

As futures contracts are literally a down payment on deferred delivery of an asset, traders need not pay any sort of funding premium or interest rate. This is a distinct difference from CFDs or standard margin accounts.

Bitcoin Hedging

Futures contracts can be used to mitigate risk of overexposure. There is a significant class of traders and early adopters who have amassed a disproportionate percentage of their overall wealth in bitcoin. Short term hedging strategies against volatility and downtrends allows for a more active management of that wealth. Bitcoin futures (and options of course, which we will address in a subsequent article) allows for this hedging without needing to actually liquidate bitcoin and buy fiat.

Perhaps an upcoming fundamental event is spooking the market, or you recognize technical patterns that precede a downturn; shorting a futures contract will soften the impact to the fiat value of your holdings. High leverages allow for disproportionate payouts should the market indeed drop, with the added benefit that you are able to keep the majority of your coin safely in it's trezor.

Bitcoin Futures Arbitrage

In a normal market, futures contracts are priced at a premium over the spot price, with the difference decreasing over time as the settlement date draws nearer. To toss in a bunch of futures jargon, this diminishing difference between the spot price and the futures price is called the basis, this normal market condition is termed contango, and when the spot and contract prices meet, which they always must do at settlement, this is called convergence.

Let's assume that you buy 10 bitcoin at $4,000. At the same time, you open a position shorting the equivalent of 10 bitcoin in futures contract, which trade at a 5% premium, or $4200. You have locked in that 5% upside, because you bought bitcoin at $4,000 and have an agreement to sell it in the future at $4,200, while at the same time hedging against downswings that could affect your holding. Of course, upside is limited to that 5%, but if you sense a rally you can liquidate your future position.

Speculation, and Where to Trade Futures

Finally, bitcoin futures are excellent vehicles for speculation. They offer exceptionally high leverages and the fees are much lower than CFDs. There used to be an advantage in using CFD instruments over futures due to the lack of liquidity in the futures markets - this is no longer the case, there are a number of futures exchanges with ample trading volumes. Bitmex leads the pack, though US traders must settle for Deribit, a medium-sized and growing futures and options exchange. OKCoin probably has the most liquidity worldwide, but they are targeted towards a Chinese clientele (and they also fabricate their stats to seem bigger than they really are).  Cryptofacilities is licensed in the UK, but they have not managed to achieve great trading volumes yet.

Onwards to Options

Our next article will focus on the wonderful world of bitcoin options, the go-to hedging tool for many a trader in mainstream markets.  However, as we must do some serious research before presuming to write anything, and as we are on vacation, there will be a delay before we finish our most important work.

Bitcoin Price (USD): 853.48