In this article, we are going to cover:
- What are Bitcoin Futures?
- What purpose do they serve?
- How you can benefit from Bitcoin Futures as a trader
Welcome to the World of Bitcoin
Bitcoin’s price rise is one for the history books – in 2010, you could buy 1 BTC for less than $0.10 USD. A decade later, the price of BTC was marching towards $50,000 USD.
Imagine if you had spent only $1 USD to buy Bitcoin in 2010 – that dollar would have turned into over $500,000 USD and climbing.
Now, imagine if you had been able to buy Bitcoin using 100x leverage – that dollar would have turned into $50,000,000 USD. This is the power of futures trading.
The Bitcoin Spot Market
Bitcoin’s story is still just getting started, and there is still plenty of time for you to get in and profit. When the Bitcoin blockchain went live in 2009, there were no exchanges to purchase cryptocurrency from. If you wanted to buy Bitcoin, you had to find an OTC broker in an online forum, or mine them yourself. Back then, it was still possible to mine Bitcoin using your home computer.
In 2010, the first spot Bitcoin exchanges started trading – “Bitcoin Market” launched in March, and the infamous “Mt.Gox” opened its digital doors in July. The spot market refers to any trade where settlement happens instantly – like on the Stock Market, or selling gold for cash at your local jewelry store.
In the crypto world, the spot market includes:
- OTC Brokers
- Instant Crypto swaps
- DeFi Swaps
- Crypto ATMs
- Peer-to-Peer Trading
What is the Futures market?
The futures market refers to any transaction in which the exchange of goods happens at some point in the future. In contrast, the spot market refers to any transaction in which the exchange happens immediately.
Futures trading is considered as a derivative. Derivatives are financial instruments that get their price from another asset. For example, a Bitcoin futures contract derives its price by using the price of Bitcoin on the spot market.
When trading futures, it is not necessary to purchase the full amount of the contract up front. Instead, only a small percent of the total value of the contract has to be paid – this is called the margin. Since futures contracts settle in the future, the full balance is due at time of settlement.
To understand futures better, let’s look at an example of an individual Bitcoin miner who uses the futures market to protect himself from volatile price swings and lock-in profit on the mined and to be mined bitcoins. The miner is running a business and has expenses – the mining rigs cost money to upgrade, run, and maintain. By utilizing a futures contract on the mined bitcoins, the miner can lock in a guaranteed price, and protect himself from volatility.
How Bitcoin Futures benefits active traders
Active traders, as well as institutional investors, often find that they prefer to work in the futures market. Futures markets are very liquid, making it very easy to enter and exit trading positions. For example, more volume is traded on Bitcoin futures exchanges compared to Bitcoin spot exchanges – billions of dollars more.
Futures trading aso provides more trading opportunities compared to the spot market. For example, being able to trade on margin allows traders to gain more exposure to the market. Many crypto futures exchanges allow for leverage up to 100x, meaning that for every $1 of margin the trader has $100 of exposure.
Let’s expand on the previous example of the individual Bitcoin miner. This time, imagine a Bitcoin mining company that has warehouses full of mining rigs, full-time employees, and lots of electricity bills and maintenance costs.
This company can use the futures market to hedge against price volatility, and capitalize on price swings to further increase their profits. By using leverage, the mining firm only has to put up a portion of the total value of the contract. This allows the firm to employ trading strategies to maximize their profit – shorting BTC at market tops and going long on market bottoms.
The Power of Leverage
While trading on margin, traders can get more exposure to the market for their capital. Crypto trading platforms typically offer leverage ranging from 1x-100x. On the Drixx trading platform, traders have the option to use leverage up to 100x. In addition to leverage, traders can stake some of their funds with Drixx, and earn a 10% APY in the process. Due to leverage, traders can still gain more market exposure, even after staking funds with Drixx.
Let’s take a look at how this would work in practice. Imagine you have $1,000 USDT in your trading account. With 25x leverage, your market exposure becomes $25,000 USDT. If you were to put half of your balance towards staking with Drixx, you would be left with $500 USDT worth of market exposure. When you factor in only 25x leverage, that $500 USDT becomes $12,500 USDT of market exposure. At 100x leverage, the $500 USDT becomes $50,000 USDT of market exposure.
To summarize, on Drixx you can:
- $1,000 USDT account balance
- Half of account balance, $500 USDT earning 10% APY
- Due to leverage, trader is able to trade with market exposure greater than account balance, while still earning 10% APY on his account balance
How Bitcoin Futures benefits the economy
The futures market in the traditional economy was initially created because of price volatility. Merchants and farmers needed a way to hedge against volatile price swings by keeping their costs fixed. This practice drew in investors, speculators, and traders. Today, the futures market is an integral part of the financial system.
The cryptocurrency ecosystem is young and growing fast. The introduction of futures trading allows the market to mature – more liquidity is poured into the crypto ecosystem, and institutional investors have an onramp they are familiar with to start trading these financial products.
More liquidity in the market leads to more efficient price discovery, which is a very important aspect of a healthy market. The crypto ecosystem is young, and still experiences a significant amount of volatility. For a healthy crypto economy to emerge, a reputable source for accurate pricing needs to be available, with minimal deviation across market prices.
When markets are volatile, the depth of the order book plays a key role in determining how far the price will rise or fall. When a spot exchange has a shallow order book, volatile price swings will be more dramatic compared to more liquid exchanges.
During times of volatility, the price across spot exchanges for cryptocurrency can vary. To minimize the difference in price, futures exchanges use an index price. The index price is an exchange weighted average of selected spot exchanges. By using multiple exchanges to form the index price, futures exchanges are protected from relying on one spot exchange having volatility that isn’t seen across other exchanges.
These index prices are then used by all types of crypto service providers to reflect the real time price of Bitcoin and other cryptocurrencies. With accurate data, a positive feedback loop is formed among market participants, helping to drive the crypto economy forward.
How to get started trading futures on Drixx
Drixx is a new, next-generation trading platform, with a powerful peer-to-peer trading engine that can process thousands of trades per second. Getting started trading crypto futures with Drixx only takes a few minutes – sign up for an account, start trading and generate yield immediately.
In the traditional financial markets, institutional investors make up the majority of futures trading volume. As technology advances, retail investors are getting in on the game. Drixx provides the tools you need to be profitable and the platform to make it happen.