Trade 2: Bitcoin Futures Riskless Spread (high yield curve condition)
When spreads are $400, buy spot and sell the future against it. Unfortunately, you can’t leverage this because spot can’t be leveraged. So you have to go all in on spot.
On Deribit that’s the underlying already – you can only trade ETH by owning ETH or BTC by owning BTC. On Bitmex, you can only own Bitcoin, every trade is a derivative against that. On these platforms, you don’t buy spot, you only sell against it. On ftx, you can buy and sell many different spot instruments and you actually own the underlying. Then you can sell the futures against that.
You can do this with 12 or so instruments at present, so ftx definitely has more options. Unfortunately, ftx charges fees for maker and taker. Spreads require trading both sides into and out of the trade and need high leverage. FTX fees can make the trade quite a bit less profitable, so you have to weigh the different options. If there’s a great spread on the Hitler Token or whatever, then it may be worth it.
You may be tempted to trade with the perpetual futures. My advice is don’t. These things are so unpredictable in terms of the funding and that can be quite high. Though it seems low at .02% or whatever, that happens 24 times a day on ftx, 3 times on the other platforms.
Perp fees add up on this trade because it’s pretty slow moving. That being said, they tend to work in sync with term structure. Annualized, the premium is generally far higher than the longest dated future, but it can flip negative in a day no problem. It’s hard to tell when it will flip back.
Long term the perp funding favors the short side, so you could simply hold a long spot against a short perp equivalent and probably make 15%+ annually. But it’s no guarantee and some months kick down hard.
I wish ftx would give better access to long-term funding data on the perps, but it only goes back 18 days or so. Bitmex has the best data for backtesting. I’ll cover the perps in another post. If you don’t see it, give me a shout on the questions post and I’ll get to it.
Back to the riskless trade at hand: usually sell the far term future because the spread will be higher. It will likely collapse before the near term expiry, so you will do better. However, it can make sense to split between the near and far term in case the curve holds up for longer. Probably best if the near term is close to expiry with a meaningful absolute premium.
Remember, slippage can be brutal, especially on less liquid contracts. Here’s an example from Deribit on the long-dated futures for ETH. It looks pretty good – the spread is a mere 0.10. BUT… you need some volume and the spread on useful volume (the obvious market maker at 14,000 on each side) is 0.65. That’s 1.30 round trip, plus fees. OUCH! And that’s only half the trade, because it doesn’t include the short side – although that only applies to the first trade.
If you split it and the premiums remain high, then let the near term expire or buy them for negative premium if possible – it happens close to expiry.
Immediately sell the far term as soon as the near term is closed (through expiry or buyback) to get the trade fully hedged again.
Close it when it gets close to $0 after a big drawdown. Or wait till expiry – this one is risk-free, so it’s pretty awesome.
Don’t use BAAKT (the CME futures contracts) – bid/ask spreads are bigger than the calendar future spreads. Only the near term is worth trading, but I haven’t done it yet. Also, they only trade during official exchange hours, not 24/7 like the others listed here. The numbers I used reference a BTC price between $7k – $12k, so adjust accordingly.
- No leverage is possible on the downside trade – when shorting the far-dated future.
- Don’t sell the far against the near – it’s much less predictable. If the spread stays across the near expiry, you lose. If it collapses sooner, you win. But that’s too risky.
- It might make sense if the near term expiry is still a ways out – say 2.5 months. But you might also go pretty far into the red.
- Leverage works well from $0-$20 spread range (BTC) because it almost never backwardates, or does so briefly and nowhere near as deep. Be careful to not get liquidated when it does briefly backwardate. ie, give your margin enough room for a $400 backwardation. It’s possible and actually happens with market crashes. Bitmex is notorious for these.
- Important: match the Bitcoin or ETH amounts on the two sides of the trade, NOT the dollar amounts for guaranteed profits. Otherwise, if the price rises more than the premium percentage, you will still lose! Which will suck.
Best exchanges for Crypto Future Spreads
- You might want to use Bitmex, though – you get .025% rebate on maker trades, so it keeps fees down.
- I like ftx, but fees are too high for this trade. They have some other pretty cool instruments, though. A lot of them.
- I don’t know about Binance, since they block my country from trading futures.
- Deribit is goodish and fees are Bitmex flavored, but the order book is less liquid. They do have actual eth.usd futures, though.
Risk Free trade in Crypto (yes, it is possible, but not always)
The trade is called futures arbitrage. Futures always expire at the spot price, so if you own the underlying you can sell futures against it. You collect the premium when the future expires. You can then repeat the cycle.
That is the second trade here: risk-free, unless you leverage high using perps or the exchange goes rogue. These exchanges are safe. They have a solid history and good reputation. Binance is the best by reputation, but it’s more restrictive.
I wouldn’t worry about any of these exchanges. Their security is very strong and their reserves are very solid in the event of a hack. Bitmex has an impregnable anti-hack system due to its hand entered withdrawals from the cold-storage wallet, but you have to wait for the daily withdrawal.
Yes. Having looked at many bots, I’ve developed an affiliate relationship with only a few. And I recommend only this one. It’s extremely customizable, even programmable if you know how. You’ll need to customize if you want to use the above strategy.
However, it’s expensive, so I recommend this if you trade less and it comes at a much lower price. However, it won’t work with the above strategy.
Two places I recommend for Canada: Bitmex and ftx. Ftx has higher fees, but still low. Check out this review of the best crypto trading sites. Deribit is good, but with fewer product lines. It has longer dated futures, which is best for the spread trade in this post.
Risk-free trades are absolutely possible in crypto, provided the conditions are correct. Just after a very strong run is the ideal time. Buy spot and sell the longest dated future. Click me for a detailed explanation.
That’s an essential primer for how to trade Bitcoin futures. The cool thing: you can trade from a flat curve and wait for a strong move up, or trade from a high curve and wait for a move down / expiry. It covers quite a few market conditions, though I advise waiting until the conditions are near ideal.
That’s going to be ultra-low premiums across the curve, or better, negative premiums for Trade 1. If prems do go negative, open the trade. If it’s your first time, please go small. Don’t make punitive mistakes on your first trade.
For Bitcoin Futures Trade 2: conditions will be a high yield curve. If you’re seeing 25% annualized premiums or above, then open a position. If you’re seeing prems above 30-35%, definitely go 100% on spot and sell the same amount of crypto future. The premium won’t be there long, so you’ll make a very nice annualized return. These trades happen maybe twice a year.
Good luck, b’wana.