BitMEX – Bitcoin Mercantile Exchange is owned by HDR Global Trading Limited, a Republic of Seychelles incorporated entity and a cryptocurrency derivatives trading platform, which offers a vast majority of bitcoin derivatives, like bitcoin futures, Perpetual Swap Contract or prediction futures contract. BitMEX allows users to trade a wide variety of products with the only option – bitcoin. There are some ways to take advantage of these tools to multiply your earnings or hedge against the risk of the spot trading.
Let’s first take a look what products they are offering.
A Futures Contract is an agreement to buy or sell a commodity, currency or other instrument at a predetermined price at a specified time in the future. This type of contract offered by BitMEX will be settled with bitcoin. Traders can keep this contract until expiry and realize the profit or loss in terms of bitcoin. This can be traded on the margin. Traders maybe need to be aware of the margin requirement in case the positions are liquidated automatically by the system. The price of the futures contracts could be different from the underlying spot price due to the fact that the products will expire in the future and market has its own anticipation for the price in the future.
However, note that the price of the futures may fluctuate a lot before expiry so traders can freely close the positions on the current market and realize the profit or loss.
Perpetual Swap Contract
It is similar to a traditional futures contracts, with a few differences. It has no expiry date or settlement. It mimics a margin-based spot market and hence trade close to the underlying reference Index Price, which is used to determine the unrealised PNL and liquidation prices. Periodic payments are made a few times in a day basing on the funding rate between the buyers and sellers. If the rate is positive, then long position holders will pay the interest and short position holders will receive the interest, and vice versa if the rate is negative.
I will show you some strategies through the combination of spot, future and swap. On the below example I will use Perpetual Swap (100x) – futures contract XBTH17 which will expire on March 31,2017 from BitMEX. Spot price is based on OKCoin USD. Perpetual Swap contract in BitMEX is called XBTUSD. For one contract of future or swap, it will be worth $1 in terms of bitcoin.
1. Futures and Spot
Future trading can be used for hedging against the risk of holding physical products. Traders buy bitcoin at the spot market and sell the equivalent value of futures contracts on BitMEX. They hold the futures contract until expiry and profit from the basis between the future and spot price. The price of futures is traded higher than spot in most of the times. Due to the existing premium, the profit could be locked and guaranteed.
How it works?
- Buying $2000 of Bitcoin from OKCoin (we could say it is $1000 for 1 bitcoin), I get 2Bitcoin
- Buying 2000 contracts of XBTH17
- Until the settlement day, the trader can sell all of bitcoins and cash out the profit in terms of USD.
You must have 1% of bitcoin equivalent with $2000 value in the account,in case the price of XBTH17 increases,your positions have the risk of being liquidated. If you have no problem with counter party risk, you could deposit the whole amount of bitcoin and use 1x leverage, you will never get the point of liquidation, otherwise the liquidation price should be monitored closely.
The potential profit
The basis is our profit, which is the difference in price between the contract price you bought in and the spot market price. This profit is guaranteed. Traders must hold the futures positions until expiry and realize the profits.
2. Swap and Spot
This strategy is very popular. Long before the funding rate is positive in most cases, which means long traders are paying interest to the short traders every 8 hours.
How it works?
- Buying $2000 worth of bitcoins
- Selling 2000 XBTUSD Perpetual Swap contracts
- When the funding rate probably turns to negative, you could close the swap positions.
Before opening the positions, we don’t know how much of the profit we will make. The reason is that funding rate varies every 8 hours, since May of 2016, XBTUSD shorters have received 37.60% of interest(47.16％ annually) As described above,this strategy has generated 35.58% of profit.
Once funding rate turns to be negative, you will be losing your profit. Based on the time you enters the position, you will have to pay the interest every 8 hours. If the negative funding rate keeps long term, traders may choose to close this position rather than continue to lose money. Since the launch of swap, bitcoin have been on the uptrend.
3. Future and Swap
This strategy is awesome. This trade is between fixed and variable funding rate. This strategy can use leveraged fund to multiply your profit.This strategy is to sell futures and buy swap contract. If the basis decrease more than the interest payment of long swap position, the trader will be earning money.
How it works?
- sell 2,000 XBTH17 contracts
- buy 2,000 XBTUSD swap contracts
- If the basis is premium when selling the futures, it is best to wait until to expiry, XBTUSD could be closed.
The trader could pursue for the profit of basis, he could wait for the increase of the basis before closing the positions of XBTH17 and XBTUSD and realise the profit. As the basis for futures jump up, the funding rate for swap will turn to positive. The strategy will work well. The traders will get profits from the increasing basis and get interest payment from the short swap positions.
In order to get decent return of equity, leverage must be applied to this strategy. Traders should isolate the margin for both contracts. 10x leverage will bump the return to 10 times. Traders could be day traders for applying this strategy.
When yield curve is rising, you could long the swap. If the positive funding rate could be over the basis of futures, you will be in a loss. When yield curve is decreasing, you could short futures. If the negative funding rate could be over the basis of futures, you will be in a loss.
For the most cases, the futures are traded at premium, traders will long futures. The short position swap will receive the interest payment. When the futures are traded at discount, traders will sell futures. The long position swap will receive the interest payment.
Above three strategies may be risky if you don’t maintain the appropriate margin level, the positions may be liquidated. It don’t factor in the risk of bitcoin’s price fluctuation.