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How Are Bitcoin Futures Priced?

Since Bitcoin futures were first introduced by the Chicago Mercantile Exchange (CME) back in 2018, there has been an explosion …

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Since Bitcoin futures were first introduced by the Chicago Mercantile Exchange (CME) back in 2018, there has been an explosion of Bitcoin futures exchanges. Today, exchanges like BitMEX and Bybit record billions of dollars in daily trading volume.

However, although Bitcoin futures are now in popular usage among traders, there still remains some misconceptions surrounding how they work, and how they are priced in particular.

With that in mind, we’ll explore the typical factors that contribute to Bitcoin futures prices, and how an understanding of this can be used to obtain near risk-free profits.

How is the Price of Bitcoin Futures Determined?

For the most part, Bitcoin futures trading platforms tend to issue contracts that expire and settle at some fixed date, usually 1-week, 1-month or 3-months in the future. At this date, the futures will be settled in the currency specified on the contract, such as the US dollar (USD) or a stablecoin.

When these contracts are initially launched, market makers set the price of the contracts and trading continues based on supply and demand. Since these futures contracts derive their value from the underlying asset—in this case, Bitcoin—they tend to move in sync with changes in the Bitcoin spot price.

As such, an increase in the Bitcoin spot price tends to increase the prices of the associated BTC futures, whereas a decrease in the spot price usually results in a concomitant fall in the contract’s price.

Theoretically, the price of futures relates to the underlying based on the following formula; Futures Price price = Spot price ∗ (1+rf −d), where rf is the risk-free rate on an annual basis, and d is the dividend.

However, a modified formula is required to derive the price of BTC futures, as follows; Bitcoin futures price = Bitcoin spot price * [1+rf*(x/365)], where x is the number of days until expiry. In essence, this simply changes the standard formula to remove the dividend and change the risk-free rate from an annual to a daily basis. For more on this, including a worked example, check out this.

With that said, it should be noted that some BTC futures are priced based on the Bitcoin reference rate, rather than the spot price. CME, one of the more popular places to trade Bitcoin futures summarizes how this rate is calculated in this short article.

With that said, it isn’t a perfect system. Because BTC markets are notoriously volatile and are often subject to significant moves based entirely on changing in trader sentiment, Bitcoin futures can be valued either higher or lower than predicted by the above formula.

In light of this, we will look at how this can affect the prices of futures in the next section.

Why do Bitcoin futures trade at a premium or discount to spot prices?

When trading Bitcoin futures, it’s important to be aware of the basic principles that govern their pricing and understand the different variables that contribute to the futures market structure.

Although Bitcoin futures tend to follow the direction of BTC spot price movements, the magnitude of this movement can differ between the two. As such, the price of BTC futures can fall below the spot price, or they can be trading at above the spot price.

In general, the latter is usually the case because of the way the interest rate is factored into the pricing of a Bitcoin futures contract. Since this interest rate is usually positive, the contract typically trades at a slight premium above the spot price.

Beyond this, there are two important concepts to be aware of, these are contango and backwardation—two terms used to describe the structure of a futures market’s forward curve. When the forward price of a Bitcoin future is higher than its spot price, this situation is known as contango, whereas if the price of Bitcoin on spot markets is higher than the futures, this is known as backwardation.

As these contracts move towards expiry, the futures price will eventually move to converge with the BTC spot price, gradually reducing the potential for arbitrage opportunities.

As we previously touched on, the BTC futures contract price is usually slightly higher than the spot rate—this is not to be confused with contango, which is described as an unusually high forward price compared to the spot price.

In general, a BTC futures contract will typically trade at a premium (in contango) during strong bull markets, when traders believe Bitcoin will be worth more in the future than it is currently. For example, if traders believe an upcoming event is likely to positively impact the value of Bitcoin in the future, they may be willing to pay a premium to secure their futures now.

On the contrary, traders that believe BTC will be worth even less in the future might look to sell their futures at a discount, leading to a backwardation situation where contracts are trading at lower than the Bitcoin spot price. This typically occurs during bear markets, where the outlook looks negative, such as following regulatory pressure or a high profile exchange hacking.

How to profit from futures premiums or discounts?

The fact that futures contracts frequently trade at premium or discount prices opens up several different opportunities that savvy traders can exploit to turn a profit with very little risk.

One of the simplest ways to turn a net profit from Bitcoin futures trading at a premium is to open what is known as a cash and carry trade. In brief, this involves buying BTC at its spot price, and selling its associated futures contract in order to lock in the futures premium as profit.

To do this, a trader would need to purchase BTC at the current spot price, and sell futures when there is a large positive delta (contango). If Bitcoin increases in value by the expiration date, then the spot position will cover any losses incurred by the short, whereas the opposite is true if its value decreases. In any case, the profit is practically guaranteed.

For example, if BTC is currently trading at $10,000 on the spot markets, but $12,000 for the 3-month futures contracts, this is equivalent to a delta of +20%. Purchasing 1 BTC at spot price and selling 1 BTC of these futures would yield a $2,000 profit when the futures settle. Since $12,000 earned from the futures sale – $10,000 spot costs = $2,000 net profit. This profit is locked-in regardless of how the Bitcoin spot price changes.

However, in order for this trade to be profitable, the Bitcoin premium needs to be high enough to cover the costs incurred by holding the futures contracts until the delivery date. During times of extreme Bitcoin volatility, the contract’s premium can be significant, which can lead to substantial profits with minimal risk.

Likewise, it is also possible to extract low-risk profits from the market when it is in backwardation, by essentially reversing the cash and carry trade to buy futures contracts that are undervalued and sell Bitcoin at current spot prices. Therefore, instead of buying BTC because it’s underpriced (as with a cash and carry trade), you sell it short because it’s overpriced—this is known as a reverse cash and carry trade.

For example, if BTC is currently trading at $12,000, but its futures contract is trading at $10,000, then you would short sell BTC on the spot market at $12,000, and use this money to buy Bitcoin futures at $10,000. Before the contracts expire, you would then accept delivery and use these funds to cover the short position.

All in all, your profit will be $2,000 (less fees). Because of this, the reverse cash and carry strategy can be used to turn a profit whenever a backwardation scenario with a sufficient negative delta appears.

Both the cash and carry, and the reverse cash and carry trade, can be done on exchanges like BitMEX, or most of its alternatives.

Conclusion: Pricing Bitcoin Futures

Overall, BTC futures contracts represent useful instruments for speculating on the direction of the market and for locking in low-risk profits by leveraging arbitrage opportunities against the Bitcoin spot price.

With that said, although it’s certainly possible to turn a profit with both cash and carry, and reverse cash and carry trades, traders do need to be aware of the potential risks involved. In particular, traders need to pay close attention to their carrying costs, since the brokerage firm or BTC futures trading platform can increase its margin rates, while those attempting to cash and carry trade on leverage will need to ensure they stay within the margin requirements.

Beyond this, during times of excessive volatility or low liquidity, it is possible for slippage to occur, potentially reducing your expected profits, whereas the potential to be caught up in socialized losses is there when trading on exchanges that use this system.

pascal thellmann

Pascal Thellmann is an algorithmic trader mostly focused on market making. You can get in touch with Pascal on LinkedIn or Twitter.

Source: https://coindiligent.com/how-are-bitcoin-futures-priced

Blockchain

KLAY Technical Analysis: Price Currently at $1.06, Close to Strong Support Level of $1.01

KLAY Technical Analysis: Price Currently at $1.06, Close to Strong Support Level of $1.01

Rate this post Klaytn is a public blockchain launched in June 2019. In order to convey the value of blockchain technology, a platform should provide an accessible user experience and development environment. Using an efficient hybrid design, the Klaytn platform combines the benefits of both public blockchains (decentralization, distributed governance) and private blockchains (low latency, scalability). Let us look at the technical analysis of KLAY. Past Performance On September 14, 2021, KLAY started trading at $1.33. As of September 20, 2021, the closing price of KLAY was $1.06. Thus, in the past week, the KLAY has been very less volatile. In the last 24 hours, KLAY has traded between $1.02-$1.86. https://www.tradingview.com/x/jRHWLpRB/ The Klaytn 2.0 global expansion of the coin has turned out to be positive news for Klaytn. However, Klaytn after grabbing institutional investors’ attention like Humanspace, Wemade Tree, and Piction Network saw hefty profit booking. A downtrend in Klaytn began after BTC’s 15% shakedown. On the four-hour chart, KLAY is in a downtrend. Moreover, traders are following the Sell-On-Rise concept. After the recent BTC shakedown, the trend has been shifted, and it is currently forming the base around the support zone. However, we can expect a breakout on the chart after some consolidation. A breakdown or a breakup will decide the future trend of the token. KLAY Technical Analysis Currently, the RSI is at 29.56%. After entering the oversold zone, the RSI has been constantly rising. Also, the RSI is currently near to its resistance level, therefore, after a short pullback, and we can expect KLAY to bounce back. MACD and EMA are in the negative zone, suggesting a sell signal. We can witness a bearish crossover between the MACD and signal lines. Therefore, the price will test support levels. On the four-hour chart, the OBV is consolidating and getting ready to continue its upward trajectory. Day-Ahead and Tomorrow The KLAY price is currently trading at $1.06, which is close to its strong support level of $1.01 on the daily chart. The breakdown from this level will highlight the next support level at $0.86. Hence, traders can take a short position after this support level is broken while keeping a stop loss at $1.09. However, on the other hand, if the price starts rising. The first resistance level the price will test is $1.17, which is a crucial one for the upcoming price trends. If the price breaks out from this resistance level, then traders can take a long position, keeping the next target of $1.29 and the stop-loss at $0.86.

The post KLAY Technical Analysis: Price Currently at $1.06, Close to Strong Support Level of $1.01 appeared first on Cryptoknowmics-Crypto News and Media Platform.

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Klaytn is a public blockchain launched in June 2019. In order to convey the value of blockchain technology, a platform should provide an accessible user experience and development environment. Using an efficient hybrid design, the Klaytn platform combines the benefits of both public blockchains (decentralization, distributed governance) and private blockchains (low latency, scalability). Let us look at the technical analysis of KLAY.

Past Performance

On September 14, 2021, KLAY started trading at $1.33. As of September 20, 2021, the closing price of KLAY was $1.06. Thus, in the past week, the KLAY has been very less volatile. In the last 24 hours, KLAY has traded between $1.02-$1.86.

TradingView Chart

The Klaytn 2.0 global expansion of the coin has turned out to be positive news for Klaytn. However, Klaytn after grabbing institutional investors’ attention like Humanspace, Wemade Tree, and Piction Network saw hefty profit booking. A downtrend in Klaytn began after BTC’s 15% shakedown.

On the four-hour chart, KLAY is in a downtrend. Moreover, traders are following the Sell-On-Rise concept. After the recent BTC shakedown, the trend has been shifted, and it is currently forming the base around the support zone.

However, we can expect a breakout on the chart after some consolidation. A breakdown or a breakup will decide the future trend of the token.

KLAY Technical Analysis

Currently, the RSI is at 29.56%. After entering the oversold zone, the RSI has been constantly rising. Also, the RSI is currently near to its resistance level, therefore, after a short pullback, and we can expect KLAY to bounce back.

MACD and EMA are in the negative zone, suggesting a sell signal. We can witness a bearish crossover between the MACD and signal lines. Therefore, the price will test support levels.

On the four-hour chart, the OBV is consolidating and getting ready to continue its upward trajectory.

Day-Ahead and Tomorrow

The KLAY price is currently trading at $1.06, which is close to its strong support level of $1.01 on the daily chart. The breakdown from this level will highlight the next support level at $0.86. Hence, traders can take a short position after this support level is broken while keeping a stop loss at $1.09.

However, on the other hand, if the price starts rising. The first resistance level the price will test is $1.17, which is a crucial one for the upcoming price trends. If the price breaks out from this resistance level, then traders can take a long position, keeping the next target of $1.29 and the stop-loss at $0.86.

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Source: https://www.cryptoknowmics.com/news/klay-technical-analysis-price-currently-at-1-06-close-to-strong-support-level-of-1-01/

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Blockchain

Robinhood Silently to Test Crypto Wallets & Crypto Transfer Functions


According to a Bloomberg report, Zero-commission financial trading platform Robinhood is low-profile testing new crypto wallet features for its customers, which will allow users to send and receive cryptocurrencies. (Read More)

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According to a Bloomberg report, Zero-commission financial trading platform Robinhood is low-profile testing new crypto wallet features for its customers, which will allow users to send and receive cryptocurrencies.

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Reportedly, Robinhood users currently can only use U.S. dollars to buy cryptocurrencies and trade digital assets on the platform but cannot withdraw the encrypted assets.

This is the first time the company has introduced deposit and withdrawal functions for digital assets like Bitcoin (BTC). 

Bloomberg reported that the beta version of the application on its IOS system reflects the company’s work on such functions. Also, there is a hidden image showing the waiting list page for users to register for the function of the encrypted wallet. It also involves the code related to the transfer of cryptocurrency assets.

Robinhood CEO Vlad Tenev pointed out in the second-quarter earnings conference call that adding a crypto wallet is the top priority of the company’s developers and said:

“It’s something that our teams are working on. The ability to deposit and withdraw cryptocurrencies is tricky to do with scale, and we want to make sure it’s done correctly and properly.”

As reported by Blockchain.News on September 9, Robinhood Markets Inc. has launched a new cryptocurrency recurring investment feature that lets customers automatically invest in cryptocurrencies on a daily, weekly, or monthly schedule.

The new feature is set to allow its customers to purchase cryptocurrency commission-free and with a little as $1 worth of cryptocurrency of their choice monthly, weekly or even daily.

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Source: https://Blockchain.News/news/robinhood-silently-to-test-crypto-wallets-crypto-transfer-functions

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Blockchain

Binance Ceases Crypto Futures and Options Offering in Australia

The exchange is pulling its derivatives services around the world amid regulatory crackdowns.

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Binance continued to limit its services as the crypto exchange most recently ceases offering futures, options and leveraged tokens to its customers in Australia. According to the official announcement on Tuesday, the step has been taken to comply with local regulations.

This came as an extension of already imposed restriction in Australia as the crypto exchange last month ceased the Australians from opening new accounts for trading options, margin products and leveraged tokens.

Though the crypto exchange giant will stop its offerings on September 24, the Aussie clients will have a 90 days deadline to reduce and close their positions for the ceased products. The exchange will allow users to increase or open new positions, but they can top-up margin balances to prevent margin calls and liquidations.

“Users will no longer be able to manually reduce or close their positions after 2021-12-23 11:59 PM (UTC). Thereafter all remaining open positions will be closed,” Binance stated.

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Compliance Is a Must Now

Once aimed to offer crypto trading services with almost every local fiat currencies, Binance is facing heavy regulatory backlash now. Multiple regulators, from big and small jurisdictions, are flagging Binance’s services for offerings without holding requisite licenses.

The financial regulator of Japan even said that the exchange is operating in the country without the mandatory license, while the Malaysian financial watchdog made the exchange exit the country.

While the Australian regulator did not specifically issue any warning against Binance, it issued a general warning against all unlicensed crypto exchanges offering services to Aussie traders.

“Our aim is to create a sustainable ecosystem around blockchain technology and digital assets,” Binance added. “Binance welcomes developments to our industry’s regulatory framework as they pose opportunities for the market players to have greater collaboration with the regulators.”

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Source: https://www.financemagnates.com/cryptocurrency/news/binance-ceases-crypto-futures-and-options-offering-in-australia/

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