Bitcoin futures on Binance
Not every futures contract is the same. Different exchanges have varying mechanisms, expirations, pricing, and fees on their futures products. Binance currently offers a few options that differ mainly in their expiration date and funding.
So far, we’ve only mentioned futures that have a defined expiration date. Binance’s futures exchange has quarterly futures, but you can find monthly and semi-annual maturities (expiration dates) on other exchanges. You can quickly check when a contract will expire from its name.
Bitcoin futures quarterly contracts on the Binance exchange have the following calendar cycle: March, June, September, and December. A BTCUSD Quarterly 0925 contract expires on 25 September 2021, 08:00:00 UTC.
When you enter a Bitcoin quarterly future on Binance, you need to maintain your margin to cover any possible losses. However, you will only pay this loss when you are liquidated, or the contract matures. With a perpetual futures contract, you also need to pay or receive a funding fee every eight hours.
Funding fees are peer-to-peer payments between traders. These rates prevent divergence in the forward price of perpetual Bitcoin futures contracts and the mark price. The mark price is similar to the spot price of BTC but it’s designed to prevent unfair liquidations that may occur when the market is highly volatile.
For example, a one-off trade in the spot market could temporarily raise the price by thousands of dollars. This volatility could liquidate futures positions but isn’t really representative of the real market price. You can see the funding rate highlighted below in red and the time it’s due.
A positive funding rate means the perpetual contract’s price is higher than the mark price. When the futures market is bullish and the funding rate is positive, traders in long positions pay the funding fee to short positions. A negative funding rate means that perpetual contracts’ prices are lower than the mark price. In this case, short positions pay the fee to long positions.
COIN-M futures and USDⓈ-M futures
Binance offers two options for trading futures: COIN-M futures with crypto as the margin and USDⓈ-M futures with BUSD/USDT as the margin. Both contract types are available as perpetual futures, but there are some slight differences between them.
COIN-M futures must use the contract’s underlying asset as collateral in your futures margin account. USDⓈ-M futures, however, allow you to use cross-collateral. This feature lets you borrow USDT and BUSD with 0% interest, using crypto assets in your spot wallet as collateral.
COIN-M futures are typically more popular with miners looking to hedge their Bitcoin positions. As the settlement is made via crypto, there is no need to transfer their BTC into stablecoins which would add an extra step to the hedging process.
How to start trading Bitcoin futures contracts?
If you want to start trading Bitcoin futures on Binance, all you need is to set up an account and get yourself some funds. Here’s a step-by-step guide on getting your first Bitcoin futures contract:
3. Navigate to the Bitcoin futures overview and select the type of contract you want to purchase. Choose between COIN-M Futures or USDⓈ-M Futures and if they are perpetual or will mature.
4. Choose the amount of leverage you are comfortable using. You can do this to the right of the [Cross] button on the trading UI. Remember, the higher the leverage, the more likely you are to be liquidated with small price movements.
5. Select the amount and type of order you want to use, then click [Buy/Long] or [Sell/Short] to open your Bitcoin futures position.
Bitcoin futures arbitrage strategies
When different cryptocurrency exchanges have differently priced futures contracts, there is an arbitration opportunity. By purchasing a contract on the cheaper exchange and selling another on the more expensive, you can profit from the difference.
For example, imagine that a BTCUSD Quarterly 0925 on Binance is $20 cheaper than another exchange. By purchasing a contract with Binance and selling a contract on the more expensive exchange, you can arbitrage the difference. However, prices do change rapidly due to automated trading bots. You need to be quick as any differential could disappear while you are making your trades. Also, consider any fees you might have to pay in your profit calculations.
Cash-and-carry arbitrage is nothing new when it comes to futures and is a market-neutral position. Market neutral positions involve buying and selling an asset at the same time in equal amounts. In this case, a trader goes long and short on an equal amount of identical futures contracts apart from their price. Crypto futures offer a significantly higher profit margin for cash-and-carry arbitrage than traditional commodity futures.
There’s much less trading efficiency compared to older markets and bigger arbitrage opportunities. To successfully use this strategy, you need to find a point where the BTC spot price is lower than the futures price.
At this point, simultaneously enter into a short position with a futures contract and purchase the same amount of bitcoin on the spot market to cover your short. When the contract reaches maturity, you can settle the short with your purchased bitcoin and arbitrage the differential you initially found.
So why does this opportunity occur in the first place? People are willing to pay a higher futures price if they don’t have the money to purchase BTC now but think the price will rise in the future. Let’s say you think in three months BTC will be worth $50,000, but it’s currently at $35,000.
At the moment, you have no money but will do in three months. In this case, you could enter a long position for a slight premium at $37,000 for delivery in three months. The cash-and-carry arbitrageur is essentially holding the BTC for you for a fee.
Share On social Media 👇