3 Ways Traders Use Bitcoin Futures to Generate Profit
Bitcoin, Investment, Trading
Ever wondered how traders use bitcoin futures to generate profit? For that, you’ll have to know what futures are. Future contracts are derivative contracts that compel the parties involved to obtain the ownership of an asset based on a future price and date, which are also used to mitigate the level of risk involved.
The seller needs to sell the underlying assets such as bonds, stocks, foreign currencies, commodities, etc. In other cases, the purchaser has to buy the underlying asset at a given price on a future date, and the date and the price are agreed upon in advance. This price does not account for the market price in current times.
These contracts are generally standardized to enable trading on an exchange based on future terms. Future contracts also mention the aggregate quantity of the underlying asset.
The different types of future contracts include commodity futures, consisting of wheat, gas, etc., stock index futures, such as Dow Jones, S&P 500, futures of valuable metals, such as gold, silver, currency futures, including those for the US Dollar and the Chinese Yuan.
Future contracts are useful for speculating the price of an underlying asset and the direction it is headed in. Moreover, firms can mitigate the prices of the goods they are inclined to sell to safeguard themselves against unfavorable prices changes.
How Can You Invest in Bitcoin Contracts?
Traders who make a profit by utilizing bitcoin futures first have to ensure they have the minimum required collateral in their account to execute the trade successfully. Different exchanges have varying base margin rates.
Several platforms provide traders the opportunity to trade in bitcoin futures, like Chicago Board Options Exchange (CBOE) and CME Group Exchange. These are regulated exchanges that aim to attract investors by stabilizing prices.
Since trading in Bitcoin comes with a certain degree of volatility, exchanges ask for high base margin rates, sometimes even 50% of the cash contract amount. Let's assume an investor buys two Bitcoin futures containing 10 Bitcoin at $5,000 each. This totals to $50,000.
The margin requirements state that trading with this exchange has to be done with a 50% deposit. This means the investor will have to deposit $25,000 as a margin.
3 Ways You Can Earn Profit In Bitcoin Futures
Trading futures is an interesting way to make a profit with Bitcoin. The process allows traders to predict the trend of Bitcoin. Based on the analysis and prediction, traders either take the long position or the short position. Let’s see what these strategies entail.
The Long Position
For the sake of understanding, let’s take a simple example. Assume that the price of a Bitcoin is $100. A trader's analysis predicts an increase in price. So, they take the long position and buy 10 futures contracts. If the forecast turns out to be correct and the price of Bitcoin goes up to $200 on the agreed-upon date, the trader books a profit.
The Short Position
The short position follows the technique of the long position, only in the opposite circumstances. Let’s assume Bitcoin is trading for $100. A trader predicts that the price will go down. As a result, he goes on to take the short position and sell 10 futures contracts at $100. If the prediction turns out to be true and the price falls down to $50, the trader will then buy back the 10 futures contracts at $50 each, thus, booking a profit.
Make Use of Indicators
To make a profit with Bitcoin futures, the traders need to have sound knowledge of indicators such as RSI, market trends, effectively read charts, and make concrete analyses. Other indicators include Moving Averages Convergence Divergence (MACD), Fibonacci Retracement, and Bollinger.
Even though Bitcoin futures are speculative, it is still possible to utilize knowledge and indicators to make somewhat accurate predictions. If the trader times it right, they could make a profit even during unfavorable times.
Benefits of Bitcoin Futures
There are several benefits to people trading in Bitcoin futures. Let’s take a quick look at some of them:
- Exposure: For just a fraction of the price, Bitcoin futures allow you to gain immense exposure into the world of crypto trading. It is a relatively lower-risk option to trade.
- Portfolio Diversification: Trading in Bitcoin futures allows traders to diversify strategies to generate more profit. Traders can utilize strategies such as short-selling, pairs trading, arbitrage, etc.
- Liquidity: Bitcoin futures are categorized as one of the most liquid markets in the crypto world. Its volume is in trillions every month and comes with reduced risk.
- Flexibility: Trading in Bitcoin futures allows people the flexibility to speculate on the price of Bitcoin and make a profit after making an informed decision.
Do Your Research
While Bitcoin is immensely popular in today’s world, trading in Bitcoin futures requires a lot of expertise, research, and a deeper understanding of complex indicators. People who trade in this form have to stay on top of the situation and be aware of different factors that determine risks and returns, volatility, etc.
Another consideration to keep in mind are the funds you'll need to trade in the futures market. Most exchanges ask for high percentages for margins. Bitcoin futures either follow spot market prices or trade at a massive premium.
Generally, making a profit on Bitcoin futures is advised for experienced investors who are not risk-averse. Spot exchanges are better suited for the ordinary investor or someone just starting out with crypto.