Try these 2 ultra-safe Bitcoin Futures trades (1 is zero-risk!)

These 2 trades work in two different market conditions – one for the upside, one for the downside. They are perfectly hedged. Here is how to trade Bitcoin futures – or ETH futures for that matter.

Contango: 2 great risk / reward benefits in bitcoin

Crypto is fairly straightforward in some sense. The futures term structure curve rarely goes into backwardation. What the hell does that mean? Contango means farther out expiry months are priced higher. Backwardation means farther out months are priced lower. Generally, they are compared to spot – or the price to buy outright.

One of the harder parts about trading crypto is that spot cannot be leveraged. This is mainly a problem when the curve is high – when longer dated months have a larger premium. I’ve seen premiums up to 35% annualized. This makes for an incredible trade from a Risk Reward perspective. But, we’ll get to that.

Bitcoin Futures Contango
Contango Futures for Bitcoin – purple is furthest dated, candles are ~ spot

Trade 1: Crypto Futures with spreads and a flat curve

I use the terms Crypto and Bitcoin interchangeably for crypto futures trading explanations.

If the curve goes flat or better, into backwardation, buy it. Meaning – sell the near term and buy the far term future. In the chart below, we’re still in Contango. The blue line is spot and it’s lower than the futures price. This is from the deribit platform. When the blue price is the same as the candles price, then the term structure is flat. At least, that’s what I call it. But I don’t associate with other people because I’m weird, so maybe they use another term.

Bitcoin Futures Contango chart
Still in Contango: not trade yet!
Still a gap. No liking.

You can leverage up pretty high here quite safely. I’ve been up to 10X leverage (5 per side) with no strain. Fees can be high on ftx because of fee structure, so I more or less recommend deribit or bitmex. However, the curve could go into backwardation. I’ve seen it happen with ETH where the curve went very strange, with the near term going well below spot, but the outer expiries staying level. That was the end of the major crash on March 12. Unfortunately, the data isn’t showing up on either platform now, so I can’t post a screenshot. (And I don’t want to figure out how to get historical data through an API cause it sounds like a royal pain in the booty.)

In the screenshot above of the chart, at bottom left, is prem, which stands for Premium. It’s annualized, so if the future is very near to expiry, it can be unbelievably high because it normalizes it to 365 days. The premium feature is really nice and a good tool. It’s only available on Deribit at the time of this writing.

Set targets on premium. You’re basically looking at the difference between the long-term and the short-term. They’ll both rise at the same time, but at different rates – that’s how you profit.

It’s the secret sauce as some goofballs call it. I call it the wet metaphor. Less sexy, I suppose and kind of gross, but sauces are – (editor – “digression cut, return to blogging.” Sound of whips striking flesh followed by screams of writer).

Highest long-term premiums I’ve seen were 36% – that was ETH, BTC was less extreme. At 5 months out, that meant absolute premiums of 15%. (Go ahead and figure it out, Einstein. I’ll go get a beer since it’s 9:30 in the morning. Wouldn’t Hemingway?)

The short term prem was at 45%, so absolute premium would be…? (Duh, not nothing?) Close! This is a quiz, so figure out why the answer is – 7.5%.

Answer: futures are spaced to every 3 months, so the near term is at 2 months if the far was at 5. Divide 45% (the annualized) by 12 X 2 to show the absolute return.

You’re a great student. Pat yourself on the head because I’m too drunk to use my arms now.

So, set targets at a differential based on absolute premiums. It doesn’t work on the prem metric because the percentages change at different rates as the expiry time shortens. In the example, subtract 15-7.5. Or just do it the easy way and use $ amounts.

With Bitcoin (trading between $5k and $12k), I usually target $100 to close 1/3 of the trade, $250 for the second third, and $500 for the final third.

Adjustments for Bitcoin Futures Trading

There’s a lot of variables here, though, so you’ll need to adjust based on the following:

  • Nearness of short term expiry.
    • The premium will close to $0 at expiration and will steadily shrink as it approaches, so if near-term is close to expiry, your differential will be in the best position. In fact, I’ve had the near term go negative briefly without any change in the BTC price. That’s because traders are settling the position, selling the near-term to close out or roll their position.
    • In this case, you might want to simply close the whole position because of the looming expiry. You don’t want the futures to expire and leave you with a massive directional position.
    • Consider closing out right at expiry so you don’t have to close out the expiring side.
  • Price appears to be rolling over
    • If the price is looking toppy (double tops, big sells at resistance, nearing a big round number, etc.), then maybe close out the whole position if your current PnL is solid.
      • (note: I’m listening to ambient music and the song that just came on is called Cosmic Despair. I should probably, therefore, switch to whiskey? Because I hate it.)
  • Near-term is still a long way off – over 2 months.
    • In this case, the third target is probably too high. Dial it back to $300-$400, depending on how vigorous the price action is.
  • Huge run-up is happening.
    • Crypto can move SO crazy fast, it’ll make your head spin. And it reverses after these huge runs very quickly. The price then crashes. You want to capture it as close to the top as possible. However, manually trading fast moving markets is a freaking stress-fest. Your profits can vanish just from slippage and turn into a loss. 3 options:
      • Manually trade it.
      • Get a bot to enter and exit based on certain conditions. This is probably the only one that could do that, but you’d have to get some code for your particular situation. The leveraged exchanges, like ftx, bitmex and Deribit, are rolling out automated systems, so those can be used. Just be careful.