3 Ways Traders Use Bitcoin Futures To Make Profits

Whenever there is data on the execution of futures contracts, many inexperienced investors and analysts instinctively conclude that they are degenerate speculators using high leverage or other risky instruments. There is no doubt that Some derivatives exchanges are known to provide incentives for retailers to use excessive leverage, but this does not represent the entire derivatives market.

Recently, concerned investors as Nithin Kamath, founder and CEO of Zerodha, questioned how derivatives exchanges could handle extreme volatility while offering 100x leverage.

If a platform offers leverage or funds the customer to buy for more money than he has in the account, the platform is taking a credit risk. With crypto exchanges that offer 10 to 100 times leverage (futures), on days like today, I wonder who is monitoring the liquidity position of these platforms 1/2

On June 16, journalist Colin Wu tweeted this Huobi had temporarily reduced the maximum trade leverage for new users to 5x. By the end of the month, the exchange had banned users based in China from trading derivatives on the platform.

3 Ways Traders Use Bitcoin Futures To Make Profits
3 Ways Traders Use Bitcoin Futures To Make Profits

After some regulatory pressure and possible complaints from the community, Binance Futures limited the trading leverage of new users to 20 times on July 19. One week later, FTX followed up on the decision, citing “Efforts to Promote Responsible Trade”.

FTX founder Sam Bankman-Fried claimed that the average open leverage position is roughly twice that and that only “a small fraction of the activity on the platform” would be affected. It is not known whether these decisions were coordinated or even ordered by a regulatory authority.

Cointelegraph previously showed how the typical volatility of 5% of cryptocurrencies means that positions with a leverage of 20x or more are regularly liquidated. Hence, here are three strategies that are commonly used by professional traders who tend to be more conservative and assertive.

Margin traders keep most of their coins in hardware wallets

Most investors understand the advantage of keeping as many coins as possible in an offline wallet since Preventing tokens from being accessed over the internet greatly reduces the risk of hacking. The downside, of course, is that this position may not hit the exchange in a timely manner, especially if the networks are congested.

For this reason, Futures contracts are the instruments of choice for traders when looking to reduce their position in volatile markets. For example, by depositing a small margin like 5% of their holdings, an investor can leverage ten times and greatly reduce their net exposure.

These traders could later sell their positions on the stock market spot after their trade is entered and close the short position at the same time. The opposite should happen for those who suddenly want to increase their exposure to futures contracts. The derivatives position would be closed when the money (or stablecoins) hit the exchange.

Force cascading liquidations

Whales know that Liquidity tends to decrease in volatile markets. Consequently, some will intentionally open heavily leveraged positions in the expectation that they will be forcibly closed due to insufficient margins.

Although they “appear” to be losing money trading, they were actually trying to force cascading sell-offs to drive the market in its preferred direction. Naturally, a trader requires a large amount of capital and possibly multiple accounts to perform such a feat.

Leverage traders benefit from the “funding fee”

Perpetual contracts, also known as reverse swaps, have a funding fee that is typically billed every eight hours. Financing rates ensure that there are no imbalances in currency risk. Although the open interest of buyers and sellers is the same at all times, the actual leverage used may vary.

If buyer (from long positions) if those who require more leverage, the funding rate will be positive. Hence, these buyers will pay the fees.

Market makers and arbitration boards will constantly monitor these prices and will open a leverage position at the end to raise these prices.. Although it seems easy to execute, these traders need to hedge their positions by buying (or selling) on ​​the spot market.

The use of derivatives requires knowledge, experience and, if possible, considerable financing requirements in order to withstand volatile phases. However, as shown above, it is possible to use leverage without being a reckless trader.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and every operation carries a risk. You should do your own research when making a decision.

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