Trading bitcoin futures and forward
Last update: May 31, 2016
- Cash’n’Carry - If futures have premium
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.
Here you should check with your country’s legistation but in some countries (namely, Germany) you are supposed to go through every single transaction that involved fiat currency. It doesn’t matter the money never saw your bank account.
Futures come with free leverage. It’s part of the OMG futures are not real thing. This gets quite important if you want to hold a position open for a month or so. With regular margin the interest would kill you at the rates of 0.1-0.5% per day.
It is not unusual to get 100x leverage on futures. Even if you don’t have a lot of Bitcoin, if your predictions are decent you can make quite some money trading futures.
Futures with lower margin can be used to lock USD value of Bitcoin. If you are a Bitcoin business that also needs to convert into fiat, you should probably have heard of Bitcoin hedging.
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.
As already said before: In some countries gaining profit in cryptocurrencies is not considered an income while ever touching fiat on an exchange is necessary to declare.
Other Bitcoin supporters see Bitcoin futures as a convenient way to trade and still be a long time holder.
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.
Each of you put in the pot a small amount of the traded value only.
When the contract is over, the in-the-money person simply gets their stake plus some of the money the counterpart put in.
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.
- Fixed margin limits your loss and should also be the default on most exchanges. Fixed margin means that you can compartmentalize your account balance to cover different trades separately.
- You basically set aside funds for each trade, and you cannot lose more than that.
- The downside is your position will be closed if there is a sudden dip even if it is a sort of glitch that lasts for a day or so.
- Cross margin on the other hand will sweep your total account balance if you get deep enough in the red. You won’t be called too soon though, which might be a valid point in some situations. Still, it’s advanced stuff. Remember that markets are not natural, manipulations happen and your opinion doesn’t matter.
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.
- Once you’ve registered, head over to deposit.
- Since you are in testnet regime, you will need testnet Bitcoin (they have no fiat value and are only good for app testing). You will find links to faucets on BitMEX directly.
- Send yourself some free coins and wait for 1 confirmation.
- Once your testnet coins are confirmed, try and place an order.
BitMEX Testnet Exchange
Try and open positions with different leverage and on different markets.
Don’t complicate it.
Press long to profit from price rise.
Press short to profit from price fall.
Your order will show up in a table below the main chart. It will show the value of Bitcoin that will have you margin called and also if you are in red numbers or in green numbers.
On most Bitcoin futures exchanges other than OKCoin you cannot hold a long and a short position simultaneously. That is, you cannot be buying and selling at the same time, which makes sense.
- To close one position, open a position in opposite direction.
- Filled short order will cancel out your open long order, if you have one.
- You can make it a limit one, it will be queued up until the Bitcoin value reaches the point to fill that order.
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 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
- Their Bitcoin Forward is a derivative, a type of futures contract.
- Basically it is trading long or short positions with leverage.
- Additionally though the contract has a set date of expiry.
- The trade will be finished that day no matter what.
- You can still walk out from the contract if you want to.
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
Fees are very low - 0.03% or less (depends on your transaction volume) for makers and 0.05% for takers.
Full ID verification is mandatory to trade futures on CryptoFacilities
No socialized loss policy / no clawback policy.
From the CryptoFacilities FAQ: “For every Forward you buy you need to put up 0.2 bitcoins initial margin. For every Forward you sell it is 0.143 bitcoins. This protects you and your counterparty against a 16.7% up/down move in the bitcoin price.”
The leverage available on CryptoFacilities is lower, the socialized loss policy is not needed here: “With one bitcoin in your account, you can buy 5 Forwards or sell 7 Forwards”.
You can keep an eye on your Bitcoin. A list of the addresses in which CryptoFacilities hold your Bitcoins is available in Blockchain tab in your account.
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.
- On BitMex, if you sign up from a US address you will not be able to deposit Bitcoin.
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
On BitMex, winners are guaranteed to get paid if margin call is late. The system is a socialized loss but slightly improved and distributed differently.
- One of the flavors of Bitcoin futures on BitMEX is completely free of socialized loss (XBU futures for hedging). It has higher entry/exit fee and has been only opened recently.
You get 100x leverage on BitMex on Bitcoin markets. Altcoin markets are less stable, leverage is smaller.
A very good thing on BitMex is their Reference section. It is available directly, the website will create you a temporary guest account if you are not logged in. Go for it if you want to learn more about Bitcoin futures, there is not a lot written about that out there yet.
BitMex Reference section
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
OKCoin is the most liquid exchange for futures. You don’t need to worry that you will get stuck with a contract you want to sell.
OKCoin futures exchange socialize losses. It effectively taxes the winners and saves the losers but it is the only way to have 100x leverage which OKCoin does. Chances are this policy will never be changed since the sight of 100x is what draws people in.
One more advantage of futures platforms
Both futures platforms mentioned here have their security worked out better than your regular Bitcoin exchange.
BitMex has a multisig wallet with manually approved payouts. No coins are ever in hot wallet. That is an additional layer of theft protection.
CryptoFacilities state themselves on their website that you can just use them as a free secure Bitcoin cold storage. It uses a third party cold storage on offline servers of Elliptic Vault Limited. Elliptic-stored Bitcoins are insured (the USD value they hold).
Verification on Bitcoin futures platforms
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.
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.
Value of 1 quanto contract on BitMex: Price * 0.00001 XBT
Underlying: BTCUSD ( ~ Bitcoin value in dollars )
Typically these futures are used for speculations.
XBU contracts (Inverse futures)
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.
Value of 1 inverse contract on BitMex: $100 always
Underlying: USDBTC ~ 1/BTCUSD ( ~ dollar value in Bitcoin )
XBU is used to lock a USD value of Bitcoins (businesses use this for hedging).
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
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.
|bought BTC||0.85837 BTC||0.85837 BTC||0.85837 BTC||0.85837 BTC|
|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|
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