What are the benefits of trading Bitcoin futures?

What are Bitcoin futures?

The Bitcoin futures contract is a financial derivative similar to the traditional futures contract in that you can agree to buy or sell a set amount of BTC on a certain date at a certain price (the forward price). You will profit if a Bitcoin futures contract has a mark price that is higher than the forward price when it expires. An asset’s mark price is determined by its spot price and other variables to determine its fair value. Later in the article, we’ll discuss this in more detail.

Traders who sell an asset borrowed from or own to make a profit are called short position traders. If the mark price is below the forward price at expiration, they lose money and the short position profits. Traders can settle contracts physically by exchanging the underlying asset or, more commonly, via cash settlements. The trader then purchases the asset later to make a profit.

Benefits of BTC Futures Trading

The futures contract

To protect their BTC holdings, bitcoin miners can short a futures contract. Upon maturity of the futures contract, the miner must settle with the other party.

It is the miner’s responsibility to pay the difference to the other party if the price of Bitcoin on the futures market (mark price) is higher than the forward price of the contract. The other party taking the long position will pay the miner the difference if the mark price is below the contract’s forward price.

Hedging

While hedging may seem more useful in physical commodity markets, it is also useful in crypto. Bitcoin miners have running costs just like farmers, and they need to get a fair price for their products. The hedging process involves both the futures market and the spot market. Let’s take a closer look at how it works.

Combining the futures contract and spot trade

When a miner sells one BTC contract for $35,000 in three months, they lose $5,000 in settlement to the long position on the contract if the mark price is $40,000 at maturity. As well as selling one BTC, the miner sells a BTC for $40,000. $40,000 covers the miner’s $5,000 loss and leaves them with $35,000, which is the hedged price.

The spot market

The miner sells his or her bitcoins on the spot market on the day of contract maturity. This sale gives him or her the market price, which should be close to the futures price.

This means that any profits or losses made in the futures market will be cancelled by the spot market trade. The two sums together provide the miner with the hedged price they seek.

Portfolio Diversification

Your portfolio can be further diversified and new trading strategies can be employed with Bitcoin futures. You should ensure that your portfolio is well balanced across multiple coins and products. Instead of simply HODLing, futures offer a wide variety of trading strategies. Besides these strategies, there are also lower-risk arbitrage strategies with smaller profit margins that can help reduce your portfolio’s overall risk. We’ll talk more about them later.

Leverage and margin

With margin trading, investors can enter larger positions than they could normally afford by borrowing funds. Bigger positions lead to larger profits as small price movements are magnified. If the market moves against your positions, your initial capital can be rapidly liquidated.

The leverage on an BTC Trading Platform is expressed as a multiplier or percentage. For example, 10x multiplies your capital by 10. So $5,000 leveraged 10x gives you $50,000 to trade with. When you leverage, your initial capital covers your losses, which is called your margin. As an example:

Two quarterly Bitcoin futures contracts cost you $30,000. You are trading with a 20x leverage, meaning you will only need to provide $3,000. If you lose more than $3,000, the exchange will liquidate your position. If you lose more than $3,000, you will be liquidated. In order to calculate margin percentage, divide 100 by the leverage multiple. 10% is 10X, 5% is 20X, and 1% is 100X. Using this percentage, you can figure out how much your contract’s price can drop before it is liquidated.