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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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The post How Are Bitcoin Futures Priced? appeared first on CoinDiligent.

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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

Ledger Live Adds Self-Custody Staking for Polkadot (DOT)

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The popular hardware wallet provider, Ledger, will add Polkadot to its wide variety of supported tokens as of March 4th. Additionally, Ledger will also enable users to stake DOT coins directly on the platform, thus increasing the total number of staking options to five.

Ledger Adds Polkadot and DOT Staking

Founded in 2014, Ledger is a digital asset wallet provider describing itself as the “global leader in security and infrastructure solutions for safeguarding critical” cryptocurrencies. In a press release shared with CryptoPotato, the company announced plans to add another blockchain project with its own cryptocurrency to the Ledger ecosystem – Polkadot (DOT).

The statement reads that the wallet provider will support Polkadot in its software application and will add it to Ledger Live – the mobile application working in parallel to the Ledger hardware wallet. Apart from storing crypto assets, Ledger Live also enables users to follow and manage the holdings even if the wallet is nowhere nearby.

Polkadot’s native digital asset – DOT – will become just the fifth coin that Ledger Live users can deploy for staking. According to the announcement, the mobile application “offers the most secure way to manage and stake DOT tokens as the private keys are stored on a dedicated hardware device that is not connected to the Internet.”

The installing process will be simplified as users need to install a designated Polkadot app on their respective devices, create a DOT account on Ledger Live, add the token to the bounded balance, nominate a validator, and confirm the information.

“Polkadot is one of the most promising projects in the entire crypto ecosystem, and we are happy to provide our users with additional options to earn rewards and participate in the expanding Polkadot ecosystem.” – commented Head of Coin Integration at Ledger – Fabrice Dautriat.

Ledger spokesperson told CryptoPotato that the integration will be fully live starting from March 4th, 2021.

DOT Price and Staking Stats

DOT has been among the best price performers as of late. The asset entered the new year at about $8 but has taken full advantage of the bullish developments in the following months and even breached $40 for a new all-time high.

Despite retracing slightly during last week’s market crash, DOT is still 350% up YTD as it currently hovers above $36.

Additionally, the token is the second-most utilized coin for staking, per data from stakingrewards.com. With over $24 billion worth locked for staking, DOT trails only to Cardano (ADA) by $4 billion. About 64% of all DOT in circulation has been staked as of writing these lines.

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Source: https://cryptopotato.com/ledger-live-adds-self-custody-staking-for-polkadot-dot/

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Blockchain

Change of Heart: Shark Tank’s Kevin O’Leary Joins the Bitcoin Club With a 3% Allocation

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The growing in popularity “I changed my mind on bitcoin” club has another prominent representative. The Canadian businessman and star of Shark Tank, Kevin O’Leary, went from calling BTC garbage to allocating 3% of his portfolio in the asset.

O’Leary Has Bought Bitcoin

Born in Montreal, Canada, O’Leary is a popular businessman, author and is perhaps best known for his role in the reality TV show – Shark Tank. Also referred to as Mr. Wonderful, O’Leary recently announced his entrance into the bitcoin ecosystem.

Apart from allocating 3% of his portfolio in the primary cryptocurrency, the businessman also pledged to invest in BTC miners using clean energy to avoid “blood coins.”

Furthermore, O’Leary said that all companies he had invested in are currently examining the possibility of putting bitcoin on their balance sheets. He attributed this to “changes in the regulatory environment,” but he failed to provide details regarding their precise nature.

Another Change of Heart Moment

Prior to his 3% BTC allocation, O’Leary rarely had anything positive to say about the cryptocurrency. Just the opposite, he was openly bashing it.

Back in 2019 he O’Leary was predominantly negative on this “digital game” called bitcoin, which was “worthless” to him. He went even further by naming it a “useless currency” and “garbage because you can’t get in and out of it in large amounts.”

“Let’s say you want to buy a piece of real estate for $10 million in Switzerland. They want a guarantee that the value comes back to the US currency. You have to somehow hedge the risk of bitcoin. That means it’s not a real currency. That means the receiver is not willing to take the risk of the volatility it has. It’s worthless.”

Fast-forward to February 2021, he was still neglectful of BTC’s potential. O’Leary said he’s not against it and actually respected the asset but dismissed any chances of putting a lot of capital in it.

“No, I don’t want to own something that goes up and down 30% in a day or a week.” – O’Leary noted and added that bitcoin is “not backed by anything. It’s just backed by your faith.”

However, it seems now that this “worthless, not backed by anything digital game” has earned at least 3% of his investment portfolio.

With this change of heart, O’Leary has joined a prominent club with several similar examples. Names such as MicroStrategy’s Michael Saylor, CNBC’s Jim Cramer, and the former Fed Governor – Kevin Warsh.

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Source: https://cryptopotato.com/change-of-heart-shark-tanks-kevin-oleary-joins-the-bitcoin-club-with-a-3-allocation/

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Blockchain

FreeBitco.in purchases 3.75 billion FUN Tokens in a multi-million dollar deal

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Through a series of ventures, FreeBitco.in seeks to promote the mass adoption and utilization of FUN Token in the iGaming and Gaming spaces.

FreeBitco.in, one of the biggest Bitcoin iGaming websites in the world, has acquired the majority of FunFair’s remaining cold storage of FUN tokens, the native cryptocurrency of the FunFair gaming ecosystem. The cold storage holds 4.45 billion FUN Tokens and FreeBitco.in has acquired 3.75 billion tokens.

Through this acquisition, FreeBitco.in plans to invest in the token’s long-term development.

“Since 2013, FreeBitco.in’s goal has always been to provide online gaming enthusiasts with a frictionless, transparent, and truly fair experience,” said a statement by FreeBitco.in. “There’s no better fit than the FUN token to help us significantly enhance our efforts.”

The FUN Token

Since 2017, FunFair Technologies has been striving to deliver a guaranteed fair, decentralized gaming experience to the mass market through blockchain technology utilizing the FUN token.

FunFair team said in a statement: 

Despite several industry firsts and significant milestones in proving that use case, it has recently become apparent that FreeBitco.in has developed a different and superior use case for the FUN token.

This announcement refers to FreeBitco.in’s Premium Membership Program; a feature that incentivizes FreeBitco.in users to buy and hold FUN tokens for significant benefits. This activity has driven considerable volume into the token economy without the burden of significant on-chain transactions. According to the statement: 

There’s no doubt that FreeBitco.in’s customers are currently generating the bulk of FUN token commercial activity rather than FunFair’s customers.

With this in mind and for the token economy to maintain its recent success, FunFair has agreed to sell the majority of their FUN token holdings to FreeBitco.in.

FUN is an ERC20 token listed on major exchanges Binance, BitFinex, HitBTC, Changelly, and OKEx, as well as decentralized exchanges like Uniswap.

FreeBitco.in’s Vision for FUN

FreeBitco.in aspires to grow the FUN token as an independent entity through a series of upcoming projects.

Our sole objective, as of now, is to work to increase FUN’s utility and value,” the FreeBitco.in. team said. “We’re thoroughly committed to its long-term growth.

Accordingly, FreeBitco.in is preparing to undertake the following initiatives:

  • Strategic Burning of Tokens: FreeBitco.in plans to invest a substantial portion of its bottom line into strategically acquiring and burning FUN tokens to elevate their value over time.
  • Improving Liquidity: FreeBitco.in is working on increasing FUN’s liquidity across all markets, thus making it easily accessible and tradeable. This is evidenced by a cumulative influx of $3 million in the FUN/ETH and FUN/USDC trading pairs on Uniswap recently, and other exchanges are set to follow.
  • New Blockchain: Based on the Ethereum blockchain, FUN prided itself on being fast, open, and secure. However, the growth of DeFi on Ethereum has been pushing gas prices up for many months, making the adoption of FUN too expensive for users. FreeBitco.in is actively exploring opportunities to port the FUN Token to a new blockchain that is faster and cheaper.
  • Dedicated Wallet: FreeBitco.in is working on creating a dedicated wallet for FUN users that can operate seamlessly between different iGaming platforms. The wallet would also help users convert their FUN tokens into multiple crypto and fiat currencies.
  • Proactive Development: FreeBitco.in is assembling a development team to build innovative, consumer-facing apps based around the FUN token, thus creating more use cases, strengthening utility, and promoting adoption.
  • Creating Effective Partnerships: FreeBitco.in seeks to build productive partnerships and affiliations with other iGaming entities to promote FUN’s identity as a transactional currency in online gambling.

Note: This is not a partnership between the two organizations, namely FreeBitco.in and FunFair Technologies. The aforementioned acquisition and venture is at the sole discretion of FreeBitco.in.

About FreeBitco.in

Founded in 2013, FreeBitco.in is one of the largest crypto-gaming websites and the seventh-largest online casino in the world (Source: SimilarWeb). FreeBitco.in was created to promote Bitcoin’s utility and facilitate its adoption. However, it has grown by leaps and bounds since then.

Powered by a fully automated, proprietary tech-stack, FreeBitco.in features a simple but powerful HI-LO Dice Game supplemented by contests, rewards, jackpots, and a popular Lamborghini giveaway.

With 41 million users, 52 million monthly visits, and a $600 million-per-annum wagering volume, its influence on the Bitcoin community is significant.

Useful Links

Official FUN Token Website: https://funtoken.io

Official FreeBitco.in Website: https://freebitco.in

Twitter: https://twitter.com/FUNtoken_io

Telegram Channel: https://t.me/officialFUNToken_channel

Telegram Chat: https://t.me/officialFUNToken

Reddit: https://www.reddit.com/user/FUN_token

Discord: https://discord.gg/e7vfgKbEKU

Disclaimer: This article is a paid post and must not be considered as news/advice. 


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Source: https://ambcrypto.com/freebitco-in-purchases-3-75-billion-fun-tokens-in-a-multi-million-dollar-deal

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