Together with trader Denis Chirkovskiy, we have sorted out how to use futures to generate profit in a situation when bitcoin's price drops.
According to CoinMarketCap, bitcoin's price first surpassed the $10,000 milestone back in November 2017. Since then, it had already increased by two times to the $20,000 mark and went back down to $10,000.
99% of people who bought into bitcoin can make money out of it only if the cryptocurrency is on the rise. In order to make money when it declines, one might consider bitcoin futures contracts. Unfortunately, futures listed on exchanges such as CBOE and CME are unavailable for an average bitcoin holder because of their high price. The contract size on CBOE equals one bitcoin, while CME requires five bitcoins. That being said, one would need to make a minimum deposit of $10,000 to trade on these exchanges. But there are still options for small traders.
The Chicago Mercantile Exchange (CME) uses specially developed bitcoin indexes to determine the price of futures contracts on the expiration date. The indexes are developed and administered not by the CME itself but its partner—a London-based company Crypto Facilities Ltd.
What is Crypto Facilities (CF)?
CF is a cryptocurrency exchange based in London and registered under the Financial Conduct Authority in the U.K.
It means that the company's activity is overseen by the watchdog of one of the world's most respected jurisdictions, and it's obvious why a financial giant such as the Chicago Mercantile Exchange chose to partner with this very company to launch its bitcoin futures contract.
The crypto exchange was founded by former top managers of the world's leading banks—Goldman Sachs, Morgan Stanley, BNP Paribas, and Société Générale.
Trading platform CF started operation three years ago—in 2015, it introduced bitcoin futures. Later, in September 2016, it began offering Ripple XRP futures. In November 2016, it partnered with the Chicago-based exchange CME to launch bitcoin indexes.
Until recently, the contract size of the futures mentioned above was also unbearable for small traders—1 BTC and 10,000 XRP respectively.
Only three months ago, on October 29, 2017, the exchange relisted all USD-denominated futures as inverse contracts, which meant that the contract size of XBT:USD contracts changed from 1 bitcoin to 1 USD and the contract size of XRP:USD contracts changed from 10,000 XRP to 1 USD.
Turbo futures and leverage
CF offers margin trading—bitcoin and ripple futures have 6x leverage.
The most desperate traders are offered bitcoin turbo futures and can go 50x leverage. In other words, to open a 1 bitcoin position, one would need just 0.02 BTC. This means you can make 2x out of your initial bid if the bitcoin price moves only 2% in your direction or lose it all if it goes 2% the opposite way.
Of course, that's an extreme option. Actually, you can make any bid, starting from $1, and hedge the USD value of your bitcoin at up to 6x leverage for normal futures and up to 50x leverage for turbo futures.
As of this writing, the CF exchange has four types of futures contracts:
Bitcoin-Dollar Futures with 6x leverage;
Bitcoin-Dollar Turbo with 50x leverage;
Ripple-Dollar Futures with 6x leverage;
Ripple-Bitcoin Futures with 6x leverage.
Futures come with 1 week, 2 weeks, 1 quarter, and 2 quarters maturities. Turbos come with 1 week and 2 weeks maturities.
Expirations take place on Fridays at 4:00 PM UTC. Settlements occur on the same day around 6:00 PM UTC and are based on the calculation of the difference between the price of the open position and the value of the index on the expiration date. Trading is executed 24/7.
To start trading, one needs to verify their account by providing identifying documents and passing a little derivatives knowledge test.
You can deposit funds in two cryptocurrencies only—bitcoin and ripple. Fiat money is not accepted.
Unlike many other crypto exchanges, Crypto Facilities does not run a single wallet for all clients. Each client has their own individual address in the bitcoin and ripple networks, and the funds are stored in a hardware wallet.
Here's a real-world example of how every one of you can make money on bitcoin's drop:
On January 29, a short position amounting to $500 was opened; a week-lasting turbo futures contract was sold at $11,143.
In two days, the mark price was at the $9,914 level; profit from that position equaled 0.0056 BTC ($55.7).
Profit or Loss in Base Currency = ( 1 / Futures Entry Price - 1 / Futures Exit Price ) * Position Size
(1/11143 - 1/9914)*(-500)=0.0056
Bitcoin’s decrease amounted to 11,143 - 9,914 = 1,229 or 11%.
Profit amounted to 55.7 / 500 = 11.1%.
Hence, the profit made from the short position compensated for the loss from bitcoin's drop; moreover, a 0.5x leverage was used, which is half the deposit amount and 1/100 the maximum 50x leverage.