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What is bitcoin contract trading

what is bitcoin contract trading

First and foremost, these options are what we would call European-style options. That means that you can’t exercise them before the expiry date. However, you can buy or sell the contract ahead of the expiry date.

Options contracts on stocks are based in the 100s, so you will have the right to buy or sell 100 shares of a stock – obviously, you can’t buy or sell 100 bitcoins. Options differ from stocks in many ways, especially since options contracts can reach tens of thousands of dollars. On top of that, Bitcoin’s high price means that these options contracts are even more expensive than the regular ones.

💡 Considering alternatives? If you’re looking for something a bit more cost efficient, stock trading might be the way to go. Take a look at our report on the leading online stock brokers to get started.

The Basics of Options: Calls and Puts, Buying and Writing 🛠️

Let’s dive a bit deeper into calls, puts, writers and buyers. All of these are the key components of options trading.

There are two types of options contracts – puts and calls. Calls give the buyer the right to buy an asset at a certain price – called the strike price.

Puts and calls allow investors to speculate on price movements and hedge their portfolios. To put it in plain language, the buyer makes money when the underlying asset price is higher than the strike price.

Now that we’ve gone over that again, let’s take a closer dive into how the most popular options trading strategies work.

The Long Call: Buying a Call Option 👍

Buying a call option means a trader believes the price of the underlying asset will go up. Although one could buy the asset itself, this will also put them directly in the line of the asset’s risk; volatile assets make this an especially risky task.

However, a trader looking to buy a call has a capped risk of the premium price they pay to buy the option. With that, the profit potential is derived from how much the spot price goes over the strike price plus the premium. For example, let’s say the strike price is $1,000 and the premium is $100. Should the spot price reach 1,200, then the profit will be $100.

In addition to buying a call, traders also have the option to sell, or write, a put option. Selling a put option requires traders to agree on a strike price, should the buyer exercise their right to buy or sell. Should the spot price go higher than the strike price, buyers won’t sell, and the writer will make a profit.

If traders are less aggressive (or bearish) on the asset, they might buy a put option which gives them the option to sell at the strike price. This way they won’t need to short the stock. The long call works the same way, offering limited risk.

Another option, should you think the price of an asset will go down, is to sell/write a call option. When doing this, an agreement is made between traders to sell the asset at the strike price should the buyer exercise their right to buy.

This strategy is similar to the short put, its aim is to accumulate the premium along with the option, as buyers decide not to exercise the option. This usually happens when the spot price is below the strike price. When the spot price is above the strike price, the writer sells the asset at a cheaper rate. Traders typically use this strategy within a covered call strategy.

Are There Options on Bitcoin Futures? 📝

Yes. Options on Bitcoin futures finally launched in January 2020 on the Chicago Mercantile Exchange (CME). Traders have been pleading for exchange-traded options on Bitcoin, and in the first quarter of this year, they arrived!

Options and futures are slightly different in that the owner has the right at the expiry date of the option to go long in the Bitcoin futures contract. The owner of a put option has the right to go short on the Bitcoin futures.

Similarly to Bitcoin options, these come at a high price, and are seriously expensive. Options on Bitcoin futures imply a significant amount of volatility.

🏅 Ready to start trading? After learning about options, the next step is to start trading with one of the top options trading platforms. Many offer a free demo account, so you can start practicing without any risk.

Long MOVE Contracts:

Let’s consider a daily MOVE contract. Suppose BTC starts trading at $5000 for the day and you are pretty sure that the market is going to be insane today. You just aren’t sure in which direction. In short, you predict the markets to be more volatile.

In this case, a good idea is to long MOVE Contracts. For the sake of this example, let us assume that the MOVE Contracts start trading at $300.

Scenario 1 : BTC moves up to $6000

Contract Value at Expiry = abs ($6000 – $5000)

Contract Value at Expiry = $1000

If you bought 1 contract at $300, you are in a decent $700 profit.

Scenario 2: BTC moves down to $4000

Contract Value at Expiry = abs ($4000 – $5000)

Contract Value at Expiry = $1000

If you bought 1 contract at $300, you are in a decent $700 profit.

Scenario 3: BTC moves only to $5200

Contract Value at Expiry = abs ($5200 – $5000)

Contract Value at Expiry = $200

If you bought 1 contract at $300, you are now in a $100 loss.

Scenario 4: BTC moves only to $4800

Contract Value at Expiry = abs ($4800 – $5000)

Contract Value at Expiry = $200

If you bought 1 contract at $300, you are now in a $100 loss.

Note how you made money when the market moved a good amount in either direction, but you lost money when the market stayed relatively stable.

If the markets did not move even a bit, the max loss in a long MOVE position is capped at the amount you have in this position. In this case, since you bought 1 contract at $300, your max loss can never exceed $300.

Bitcoin Trader: Concluding Remarks

Bitcoin Trader is state-of the-art trading software with a success rate up to 85%. Now we know why. It is easy to use, efficient, and provides all necessary support to ensure that every trader feels safe and secure. The barriers to entry into the cryptocurrency market have been significantly reduced by Bitcoin Trader. Both novice and experienced traders only need to make a small deposit to be able to trade their first cryptocurrency trades.

It is clear that Bitcoin Trader trading software should be considered by every trader who wants to diversify their portfolio or grow their financial assets. It is a market leader in execution, detail-oriented trading, and finding profitable trades.

Pros and Cons of Bitcoin Trader

ProsCons Best For Beginner Traders Initial Deposit Could Be Lower Not Available In All Countries Friendly & Efficient Account Brokers Withdraw Crypto Direct To Wallet No Withdrawal Fees Market Volatility Management

The Difference Between Bitcoin Perpetual Contracts and Bitcoin Futures

Bitcoin futures are obviously common in crypto trading. Traders speculate on the future prices of Bitcoin and can benefit depending on the accuracy of their forecasts. However, Bitcoin perpetual contracts are increasingly becoming the most popular kind of cryptocurrency derivative on the market.

There are some key differences between the two. In theory, a futures contract is an agreement between two counterparty agents to buy or sell a financial instrument or commodity at a predetermined price on a specified future date. Upon expiry, the buyer or seller must exercise the condition of the agreement, buying or selling regardless of the price of the underlying asset. In practice, however, most traded futures are non-deliverables, meaning the difference needs to be covered, and no delivery occurs.

Like with perpetual contracts, there is leverage, and Bitcoin futures are a tool for hedging against future uncertainties. Additionally, because of leverage and because one can take a long or short position, there is an avenue for extracting benefits from both rising or falling markets. A key advantage of Bitcoin futures is that investors from jurisdictions where Bitcoin trading is banned can still participate via publicly regulated exchanges.

Note, though, that the objective of a Bitcoin futures contract is not only profit maximization but also hedging and risk management. Often, Bitcoin futures help smooth out the fluctuations of other volatile assets.

Bitcoin futures first came to the market in December 2017 via Cboe and CME. Back then, BTC trading was around its all-time high. Later, BitMex and OKEx joined the bandwagon. Some analysts contend that JP Morgan and NASDAQ have interest in offering similar products.

Thus far, these are some of the leading cryptocurrency exchanges offering BTC derivative products:

Exchange NameBitcoin ProductDaily Trading VolumesLeverageCMEFutures$90,092,749 (expires in 2019)3.33xBitMexPerpetual and Futures$5,960,476,439 (perpetuals) $151,411,711 (futures)Up to 100xOKEXPerpetual and Futures$847,628,890 (perpetuals) $2,973,858,902 (futures)up to 100xDeribitPerpetual, Futures and Options$548,187,447 (perpetuals)Up to 100XXena ExchangePerpetual, Futures (to be added soon)$1,455,706Up to 20xPrime XBTPerpetual$277,591,867Up to 100xBybitPerpetual$1,310,546,664Up to 100x

Obviously, Bitcoin futures offer flexibility, as most are non-deliverable once the contract expires. As such, they can provide investors with risk-management capabilities while allowing for margin trading, transparency through regulation, and better price discovery.

Overly, the benefits of Bitcoin futures are as follows:

  • Most Bitcoin futures are offered by regulated exchanges, which opens up the Bitcoin investment base, drawing interested investors even from jurisdictions where BTC is banned.
  • Institutions can recommend Bitcoin futures to interested investors.
  • There is better liquidity thanks to Bitcoin futures.

How Secure Are Perpetual Contracts?

Undoubtedly, the security of cryptocurrency exchanges is vital for the success of the digital asset ecosystem, which is why there is a growing need for impenetrable security that fosters confidence, preventing hesitation from the public.

In all this, the fact remains that blockchains are not the problem. For example, it is not economically viable to reverse BTC transactions through a majority attack due to the computing power required and the inherent protective mechanism employed by the creator. The sources of all these hacks can be zeroed in on third parties.

Exchanges’ hot wallets and users are prone to attacks such as phishing. When hackers strike, they steal not only funds but also sensitive personal data demanded in KYC, such as passport pictures, social security numbers, and home addresses. For this reason, it is imperative that the security of an exchange’s fund is collaborative.

Ultimately, the security of initial margins depends on how robust the exchange’s security is. If security is guaranteed, then trading cryptocurrency derivative products will be a resounding success. Below are some of the tactics employed by most exchanges to boost security:

  • Mandatory KYC and AML procedures
  • Regular third-party testing of the exchange’s security systems
  • Segregation of the internal network from the web
  • Routing of external communications via demilitarized zones
  • Continuous staff training on the importance of security
  • Wallet protection and storage of the majority of funds in cold multisignature wallets often distributed across different geographies
  • Cryptographical multifactor verification for sensitive operations
  • Fraud-monitoring platforms
  • Recommending 2FA to all clients

Along with all the above-mentioned measures, Xena Exchange offers dAccs that ensure secure, high-speed trading and liquidity. Through Xena’s dAccs, derivative contract traders have an edge because they don’t commit their entire BTC holdings to the exchange.

Instead, they have full control of their funds directly on a secure, multisig wallet while simultaneously enjoying the speed and liquidity of centralized exchanges. This is possible through a channel in between the multisig wallet and the exchange. This approach helps reduce customer counterparty risk by up to 90 percent.

In addition, trading perpetual contracts on Xena Exchange is free of manipulation.

Where Can You Trade Bitcoin Futures?

Bitcoin futures can be traded on not only crypto exchanges but regular ones, too. Not all exchanges offer this feature, however, and some of them don’t allow crypto futures trading for residents of certain countries, so make sure to check the platform’s FAQ and Terms of Use to see whether you’re legally allowed to trade Bitcoin futures contracts on it or not.

3. Bitcoin CFDs vs. Bitcoin Futures

CFDs and futures sound very similar, and many new traders believe they are completely identical. However, there are some differences between the two products:

To start with, while futures have a specific expiration date, CFDs don’t. A CFD can be kept for as long as the terms of the contract allow, and there’s no need to settle it on a specific date. When the CFD is liquidated, the difference in price will be calculated and paid to the appropriate party.

CFDs are also easier to conduct and have a lower barrier to entry than futures. In general, futures tend to trade on large exchanges and have a higher minimum commitment, since these contracts are meant to be used by institutional investors.

Additionally, futures trade on open markets where the orderbook is visible to all. This allows traders to spot more opportunities in the market. With CFDs on the other hand, you’re trading against a single broker and there’s only his price available for trading.

Another difference is that CFDs have larger spreads than futures. This means that the difference between the “instant buy” and “instant sell” price is bigger (this reflects the broker’s profit). However, CFDs also often charge lower fees for their operation than futures.

Finally, it’s usually much easier to open a CFD account than a futures account. In general, there is less regulation around contracts for difference, and you can start trading with much less capital.

Example 6: Pay-for-proof contracts: buying a solution to any pure function

In example 4, we saw how to make payments conditional on the output of some arbitrary program. Those programs are very powerful and can do anything a regular program can do, like fetching web pages. The downside is that a third party is required (an oracle). Although there are techniques that can help reduce the trust needed in the oracle, none can reduce it to zero.

For a restricted class of programs, pure functions, new cryptographic techniques are starting to become available that can actually reduce the trust needed all the way to zero with no third parties. These programs cannot perform any I/O, but in many cases this restriction turns out to be unimportant or can be worked around in other ways, like by giving the program a signed/timestamped document as an input instead of having the program download it.

Gregory Maxwell has invented a protocol for doing this, which you can read about here: Zero Knowledge Contingent Payment

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