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.
Litecoin, Monero, Ethereum Classic Price Analysis: 17 May
The Bitcoin market has been on a downtrend and the altcoin market has been mirroring its losses. The markets of Litecoin [LTC], Monero [XMR], and Ethereum Classic [ETC] have been highlighting a similar downtrend while also trying to recover in the short term.
The above chart of Litecoin [LTC] suggested that its value plummeted by 17% within 16-hours. This loss was from $325 to $267. However, after the 17% drop, the LTC value recovered and was now trading at $289.10.
The digital asset has been moving towards immediate resistance at $297.26 but there was evident bearishness in the market due to the fall. As the price slipped low, relative strength index was suggesting that the asset had entered the oversold zone, but this price posed a buying opportunity for others. This buying pressure that was created has pushed the digital asset into a near-equilibrium zone.
The price hangs around the $288-range and the traders may want to be more vigilant as the momentum shifts.
Unlike the Litecoin market, Monero [XMR] market was noting a rise in volatility. The sudden plunge in price pushed LTC from $391 to under $345. Even after recovering to $365, resistance at this level pushed the price once again lower. At the time of press, LTC was trading at $361.
The rise in volatility was indicated by the divergence of Bollinger bands, while the signal line was also plummeting. This suggested that the recent price action has paved the way for the bearishness and as LTC tried to stabilize at the current price, the relative strength index noted that the selling pressure had also increased as it hit 38. Meanwhile, negative momentum was adding to the falling price of LTC.
Ethereum Classic [ETC]
The Etheruem Classic [ETC] price was not as impacted as other alts, thanks to its hard fork Ethereum [ETH]. The ETC price dropped by 19% but managed to recover by 15%. The loss carried ETC value from $110 to 80, but as the market recovers, this value has been pushed to $91.
With the wild price movement, Bollinger bands were noted to converge, which meant that volatility was reducing. As the price surged past the $89 resistance, the market was trying to hold on to this price level. This was also indicated by RSI which was at 47, close to equilibrium. This meant that the buying and the selling pressures were evenly matched. However, the momentum has remained negative.
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Price analysis 5/17: BTC, ETH, BNB, ADA, DOGE, XRP, DOT, BCH, LTC, UNI
Bitcoin (BTC) plummeted to an intraday low near $42,000 today, dropping 35% from its all-time high at $64,849.27. Over the weekend the selling intensified as news that Tesla may have sold its Bitcoin holdings made waves, and even after this was proven to be untrue, Bitcoin’s market dominance had still been pulled down to a three-year low below 40%.
While this decline in Bitcoin may have scared new investors, stock-to-flow creator PlanB said the performance of the current bull phase is still better than the 2017 bull run. PlanB also warned investors to expect several 30% dips during Bitcoin’s climb to a new all-time high.
Although the long-term story remains intact, the sharp bearish moves in Bitcoin on every minor negative news tidbit suggest nervousness among investors. The lack of a sharp recovery even after Elon Musk’s clarification that “Tesla has not sold any Bitcoin” suggests investors are not buying aggressively on positive news.
Will Bitcoin’s weakness stall the altcoin season or is Bitcoin getting ready for a sharp relief rally? Let’s analyze the charts of the top-10 cryptocurrencies to find out.
Bitcoin broke below the neckline of the head and shoulders pattern on May 16 but the bears could not achieve a close below it. By the end of the day, the price rebounded and closed above the neckline.
However, the selling resumed today and the bears have pulled the price below the neckline. If the BTC/USDT pair closes below the neckline, the head and shoulders pattern will complete.
If the bulls do not push the price back above the neckline quickly, the selling is likely to intensify further. The pair could then start its decline toward the pattern target at $31,653.73.
The downsloping 20-day exponential moving average ($52,265) and the relative strength index (RSI) in the oversold territory indicate the bears have the upper hand.
Any pullback is likely to face stiff resistance at the 20-day EMA. This negative view will invalidate if the bulls push the price above the stiff overhead resistance at $60,000.
Ether (ETH) is correcting the sharp uptrend of the past few days. The price dipped below the 20-day EMA ($3,431) today but the bulls are trying to arrest the decline near the 38.2% Fibonacci retracement level at $3,195.98.
If the price rebounds off the current level and rises above $3,600, the bulls will try to push the price to $4,200. However, the 20-day EMA has flattened out and the RSI has dropped near the midpoint, suggesting the bullish momentum may be weakening.
If the buyers fail to defend the $3,195.98 support, the decline could extend to the next support at the 50-day simple moving average ($2,709). Such a deep fall is likely to delay the start of the next leg of the uptrend.
Binance Coin (BNB) broke below the 50-day SMA ($520) for the first time since Dec. 13. The 20-day EMA ($585) has started to turn down and the RSI has slipped below 42, suggesting the bears are trying to gain the upper hand.
If the current recovery turns down from the 20-day EMA, it will suggest that traders are closing their positions on rallies. That will increase the possibility of a break below $480. If that happens, the BNB/USDT pair may drop to $428 and then to $348.70.
The first sign of strength will be a breakout and close above $615. Such a move will suggest that the correction is over and the pair may be ready to resume the uptrend. A breakout and close above $691.77 could start the next leg of the uptrend that may reach $796.64.
Cardano (ADA) is in a strong uptrend. It reached a new all-time high at $2.34 on May 16 where profit-booking set in. If the price breaks below $1.95, the altcoin may drop to the 20-day EMA ($1.71).
A strong rebound off the 20-day EMA will suggest the sentiment remains bullish and traders are buying on dips. On the contrary, a break below the 20-day EMA will indicate that supply exceeds demand and that may pull the price down to the 50-day SMA ($1.39).
Instead, if the price turns up from the current level and rises above $2.34, the ADA/USDT pair may resume its uptrend. The next target objective on the upside is $2.82 and then $3. The rising moving averages and the RSI above 63 indicate the path of least resistance is to the upside.
The bulls are currently attempting to defend the 20-day EMA ($0.46). If they succeed, Dogecoin (DOGE) could move up to $0.59 where the bulls are likely to encounter stiff resistance from the bears.
If the price turns down from $0.59, the possibility of a break below the 20-day EMA increases. If that happens, the DOGE/USDT pair could drop to the critical support at $0.35. A strong rebound off this support could keep the pair range-bound between $0.35 and $0.59 for a few days.
Contrary to this assumption, if the bulls drive the price above $0.59, the pair may retest the all-time high at $0.73. A breakout of this resistance could start the next leg of the uptrend that may reach $0.83 and then $1.
The bulls purchased the dip to the support line of the symmetrical triangle today, indicating buying at lower levels. The buyers will now try to propel XRP above the resistance line of the triangle.
If they succeed, the XRP/USDT pair could pick up momentum and rally to the 52-week high at $1.96.This level may act as stiff resistance but if the bulls can overcome it, the pair may rally to $2.68.
The flat 20-day EMA ($1.43) and the RSI above 53 do not signal a clear advantage to the bulls. If the price turns down from the resistance line of the triangle, the pair may extend its stay inside the triangle for a few more days.
The trend will turn in favor of the bears if the price breaks below the triangle. That could result in a decline to $0.88.
Polkadot (DOT) broke out of the $44 overhead resistance on May 14 but the bulls could not sustain the higher levels. The bears pulled the price back below the breakout level at $44 on May 15.
The 20-day EMA ($39.34) is flattening out and the RSI is near the midpoint, suggesting the range-bound action may continue for a few more days.
A break below $32.50 could open the gates for a decline to the critical support at $26.50. A bounce off this support will suggest accumulation at lower levels.
On the other hand, if the price rises from the current level and breaks above $44, it will suggest that sentiment remains positive and the bulls continue to buy at lower levels. That will increase the possibility of a retest of the all-time high at $49.78.
Bitcoin Cash (BCH) broke and closed below the 20-day EMA ($1,178) on May 15. The bulls attempted to push the price back above the 20-day EMA on May 16 but failed to sustain the higher levels. This led to further selling today and the price dipped to the psychological level at $1,000.
The bulls are currently attempting to defend the support at $1,000. However, any relief rally from the current level is likely to face stiff resistance at the 20-day EMA ($1,170) and then at $1,362.74.
If the price turns down from this level, the BCH/USDT pair may remain range-bound for a few days.
This neutral view will invalidate if the pair continues lower and breaks below the 50-day SMA ($922). Such a move could open the doors for a further decline to $700. The trend may favor the bulls on a break and close above $1,362.74.
The failure of the bulls to build upon the breakout of the ascending broadening wedge formation could have attracted aggressive profit-booking from short-term traders. This pulled Litecoin (LTC) to the 20-day EMA ($308) on May 12.
Although the bulls attempted a recovery on May 13 and 14, the rebound fizzled out at $339.10. The selling resumed on May 15 and sent the LTC/USDT pair below the 20-day EMA.
Today, the bulls are attempting to defend the 50-day SMA ($270). However, the 20-day EMA has started to slope down and the RSI is below 45, suggesting the bears are trying to make a comeback.
If the pair breaks below the 50-day SMA, the selling could intensify and the pair may drop to the support line of the wedge. This negative view will be negated if the bulls push the price above $340.
Uniswap (UNI) broke below the support line of the ascending channel today but the bears could not capitalize on this weakness. The bulls are currently attempting to push the price back into the channel.
However, the 20-day EMA ($37.72) has started to turn down and the RSI has dipped into the negative territory, suggesting the bears have a slight advantage. If the price closes below the channel, it will indicate a possible change in trend.
The UNI/USDT pair could then drop to the $27.50 to $25 support zone and then to $20. This negative view will invalidate if the buyers propel the price above $40.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
Market data is provided by HitBTC exchange.
‘Cash, candy or Bitcoin’: Paying minors in 2021
A Bloomberg contributor will be paying his son Bitcoin in exchange for chores above and beyond his usual scope, but he is seemingly unable to decide on the best means of payment.
In an opinion piece today, Eddie Yoon said he would pay his seventh grader 0.00055 Bitcoin (BTC) — roughly $23.50 at the time of publication — for the boy helping him with competitive pricing benchmarking for a rental property. Yoon said he gave his son Luke a choice of “cash, candy, or Bitcoin” for the work, closing the deal with a handshake.
According to the Bloomberg contributor, the move was based on giving his children a role in their own financial decisions rather than jumping in on any craze. He said he helped Luke purchase Tesla stock in 2016 and his daughters buy into Apple and Alphabet.
“We’ve told our kids that we will fund any investment that we collectively agree on between now and the age of 25,” said Yoon. “We don’t plan to leave them an inheritance, so we want them to be equipped for a future in which their own investments give them financial security.”
Yoon added that he has “yet to figure out which cryptocurrency platform allows minors to open accounts.” There are few, if any, laws that prohibit children under the age of 18 from HOLDing or trading cryptocurrency, but many exchanges still require verification to ensure their users are of legal age. Alternatively, adults can gift minors crypto with paper wallets or through Bitcoin ATMs.
“We don’t want our kids to necessarily beat the market. We want our kids to be able to think independently about money. We want them to manage their money, not let it manage them. We want them to find the right balance between ignorance and obsession with money.”
Though many children — and adults — may not always be able to understand the complexities of the market, some crypto enthusiasts have already taken the first steps toward them becoming more financially educated. Three-year-old Lily Knight, born during the 2017 bull run, meets both criteria by teaching others about crypto and blockchain on her YouTube channel.
Dallas Mavericks owner Mark Cuban said in a tweet Saturday that he and his 11-year-old son Jake collectively own 3,250 Dogecoin (DOGE) — roughly $1,556 at the time of publication. Cuban previously claimed he used the token for entertainment and financial education.
However, one of the youngest prominent crypto holders is Tesla CEO Elon Musk’s son X Æ A-Xii — pronounced “ex ash eh twelve” — who recently celebrated his first birthday. Musk said he purchased some DOGE for the baby at nine months old, referring to him as a “toddler HODLer.”
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