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Trading bitcoin futures and forward

Last update: May 31, 2016

Why would you want to trade derivatives?

Trading futures comes handy if you want to make profit by trading from both long and short positions and still make profit in Bitcoin only.

Cannot this be also done simply by selling dear and then buying back?

Sure, but by trading futures you avoid complications that this implies.

Accounting currency of all Bitcoin futures

On futures platforms, Bitcoin is what they call accounting currency. Historically, these base currencies are the currencies in which you pay bills or your business pays contracts.

When it comes to Bitcoin, many traders just find it useful to keep only coins.

About Bitcoin Futures: Why is the leverage free

”OMG futures are not real”

So how come you pay no fee on margin when trading future contracts?

By the way, no worries, the exchange itself charges a fee on entering and exiting the position. It is not too good to be true.

Let’s see a typical margin trade (not futures). You have 0.2 BTC on your account. You can get 5x leverage and borrow 0.8 BTC to trade 1.0 BTC in whatever way you wish. You end up with 1.1 BTC two days later. Out of that you only get less than 0.3 BTC since you have to pay back those 0.8 BTC plus a little interest.

So, when you think about it, why do you actually move those 0.8 BTC at all? Can it somehow go without it?

~ It can, and it is called futures.

This whole borrowing and interest thing is skipped and what remains is you and the guy on the other side of the contract.

That’s why there is no need to borrow funds from a third party or even from the exchange. Both sides of the contract put in some money, just the ratio will change - how much will each trader walk away with.

Fixed and cross margin, margin call and liquidation

As with any form of leverage, you have to be keeping a maintenance margin. If your order is too deep in red numbers, it will be forcibly closed. That is indeed set up in the system to avoid disputes and people not paying contracts.

There are two types of margin, you will (if you are reading this) probably want to go for fixed margin.

What is socialized loss

It doesn’t happen often but it come to the situation the system margin-calls a position too late. But with leverages of 100x or so it is not that hard to imagine, even if the price of BTC is relatively stable nowadays.

When margin call comes late, the trader who is called gets into a negative account balance. You can probably imagine it would be no joke to try and get the money out of someone on an anonymous online exchange that requires no verification. That is the reason for socialized loss: the missing money is deducted from all trade profits on futures market on that exchange.

Of course, traders don’t like that - until they get to the other side of socialized loss.

What is with the expiration dates?

Each Bitcoin futures contract has an expiration date. On that day it will be settled at the spot market price of Bitcoin.

When you are entering a Bitcoin futures contract - say, a long contract - you state that you think the price of BTC will rise before one months time. Someone on the other side thinks it will fall before one months time.

What if the price is high enough in one weeks time?

If you are on a liquid exchange, you don’t need to stay stuck with the contract. You just sell it to the market place and cash in. Someone else will buy it and maybe sell it again, and again. In the end some trader will end up keeping it until the expiration date.

Keep in mind that with derivatives a liquid exchange is really vital!

Futures are weird

Still cannot wrap your head around that? That’s why there is BitMEX testnet.

You can register at testnet.bitmex.com (You have to register separately if you already have a BitMex account) and test-trade till the cows come home.

BitMEX Testnet Exchange

See picture below.


This is probably all you need to know to start trading Bitcoin futures. Do spend some time paper trading and on the testnet, practice is the only way to get the grips of it.

It is all still over-simplified, there are different types of Bitcoin futures having edge in different things. Some resources can be found at the end of this article.


Bitcoin Futures Markets

CryptoFacilities

CryptoFacilities is one of the exchanges that are new-ish, with great user interface and about as legit as you can get. They do insurance, hedge and trading. For you that probably means you can either trade futures with leverage up to 5x - 7x or you can keep your coins in a cold storage provided to CryptoFacilities by a third party.

This is how your account summary looks like with an open position. The wheel on the RHS is your profit/loss monitoring.

As of February 2016 futures on CryptoFacilities are not available for people from the US anymore due to complicated legal situation of Bitcoin futures in the States.

The US Commodity Futures Trading Commission (CFTC) recently announced settlements with two digital currency businesses, which, at first glance, may appear to impact only businesses, not individual traders. But the implications for anyone trading digital currencies, like bitcoins, regardless of where they live and trade are significant and need to be carefully considered. Coindesk, Oct 2015

CryptoFacilities Bitcoin Forward

Typically contracts last 1 week - these are most liquid. CryptoFacilities also offer other shorter or longer contracts: 1W, 2W, 3W, 4W, 3M, 6M, and 9M.

USD prices for BTC values

On CryptoFacilities BTCUSSD market the price of futures is denominated in USD which means you can buy worth of $500 and close the position when the price is $600. That gives you profit of $100 before fees.

Your profit however will be sent to you in Bitcoin. Likewise, only Bitcoin deposits are supported.

What to expect of CryptoFacilities

BitMex

BitMex in principle works in similar fashion, even though the product (type of futures contract) is a little different. But it is not necessary to delve into details if you just want to make a more Bitcoin out of your Bitcoin.

Entry/exit fees

At the moment the fees for BTCUSD futures are -0.025% for makers (that means a rebate of 0.025% on orders that are not executed immediately), 0.075% for taker orders and additional 0.05% settlement fee.

Sign up with this BitMex promo code and get 10% off of fees through your first 6 months.

What to expect of BitMex

BitMex Reference section

OKCoin

OKCoin is a Chinese trading platform with immense volume and liquidity. They indeed offer future contracts too. The perk is that OKCoin lets you open buy and sell positions on the same market at the same time.

OKCoin doesn’t need full verification. You have to state your personals but there is no Netverify or anything like that, as of yet. That could probably look like an opportunity for people from complicated locations.

Be careful though. Successful unverified accounts on any exchange might be probed and asked to verify for no reason. Not complying typically means losing coin.

What to expect of OKCoin

One more advantage of futures platforms

Both futures platforms mentioned here have their security worked out better than your regular Bitcoin exchange.

Verification on Bitcoin futures platforms

FYI, BitMex and CryptoFacilities require ID verification before you start trading. This is to comply with KYC and serves to validate the country you live in:

BitMex: “Certain jurisdictions restrict the trading of Bitcoin derivatives. For this reason, we require verification of your country of residence before depositing.”

Both have a restriction towards traders from the US.

OKCoin doesn’t require full identity verification.

Ledger Wallet protects your bitcoins_

Types of Bitcoin future contracts

XBT contracts (Quanto futures)

You get Quanto futures on BitMex.

Quanto style futures contract is quoted in USD but the multiplier is in Bitcoin. This is good for long positions: profit comes in Bitcoin, but the value of the profit is even higher since the dollar price of Bitcoin grew itself.

XBU contracts (Inverse futures)

Inverse futures is what you get on OKCoin. BitMex now offers a XBU contract too.

One contract on OKCoin is always worth $100, which may be 0.5 BTC or 0.1 BTC or anything else, depends on the spot price of Bitcoin. If you trade long in this case, prices (and your profit) are denominated in USD. You will still get Bitcoin but as long as Bitcoin grows, the dollar weakens. You are worse and worse off the more Bitcoin grows.

On the other hand, if you go short (and are right), you profit better since the dollar gets stronger.

What Is Bitcoin Forward

Trading platform CryptoFacilities specializes in Bitcoin forward.

This is the very simple explanation CryptoFacilities provide:

If you think the bitcoin price will increase, you buy Forwards. Buying one Forward is very similar to buying one bitcoin. If you think the price will decrease, you sell Forwards. Again, this is very similar to selling Bitcoins, only that you can sell more Forwards than you own Bitcoins.

Forwards also come with maturity, they expire after given time. There are 1W, 2W, 3W, 4W, 3M, 6M, and 9M contracts available.

Bitcoin Forward is a mix of Quanto and Inverse futures. It can be used to hedge USD even though the contracts are denominated as Bitcoin per contract.

Another point is that forward is a private contract. All of the money in the trade is covered by the two traders who take opposite sides of the coin. The exchange that provides forward contracts puts no money in to fund the traders’ margin. With futures, the contracts are to some extend covered with a fund provided by the exchange.

What to read

Dust still hasn’t settled? Other articles on Bitcoin futures trading are on Bitcoinfuturesguide or Bitcoinfuturesinfo.

Note to hedging

How are Bitcoin futures used for hedging? Futures are supposed to offset any kind of unwanted volatility and price movements. It is something that moves in opposite direction from your hedged asset.


Bitcoin Futures Arbitrage

Cash and carry arbitrage

Cash and carry arbitrage is one thing you can do if you want to profit in fiat and if futures contract has a premium. That means, if there is a futures contract, ideally expiring soon, that has higher USD price than what is the current spot price of BTC.

This is not always happening - the market sentiment has to be bullish, everyone thinks price will rise and it becomes more convenient to hold a right to Bitcoin in the future (when it has higher value) than now. You can check this hourly updated page to see if BTC futures trade at premium right now.

If there is premium to futures, you can earn risk free dollars by buying BTC spot, selling the USD worth of futures contracts and waiting till maturity.

If in the meantime (before contract maturity) the premium gets lost or Bitcoin price gets to change substantially, you might lose BTC but as for USD, you will still make profit.

It’s best with numbers so, there you go:

Or get the data in table below with calculations as OpenOffice spreadsheet.

versions 1 2 3 4
weeklies sell $470.00 $470.00 $470.00 $470.00
spot buy $466.00 $466.00 $466.00 $466.00
spot maturity $464.00 $455.00 $485.00 $466.00
contract $100.00      
         
spent USD $400.00 $400.00 $400.00 $400.00
bought BTC 0.85837 BTC 0.85837 BTC 0.85837 BTC 0.85837 BTC
sold contracts 4 4 4 4
return on maturity 0.01293 BTC 0.03297 BTC -0.03093 BTC 0.00858 BTC
all holdings on maturity 0.87130 BTC 0.89134 BTC 0.82744 BTC 0.86695 BTC
all holdings on maturity $404.28 $405.56 $401.31 $404.00
earned USD $4.28 $5.56 $1.31 $4.00

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