Crypto Futures Trading Strategies for 2022

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Crypto Futures Trading Strategies for 2022

Crypto Future Trading Strategies for 2022

In April 2021, Bitcoin, the most popular and traded cryptocurrency in the world grew by 1100 billion USD in market capitalization.

Since then experts and publications alike have been debating over the lucrativeness of the cryptocurrency market. Not just direct investment into cryptocurrency, but also other sub-branches such as Defi, and Crypto Futures are slowly becoming an integral part of investment portfolios worldwide.

Considering the nascent and volatile nature of cryptocurrencies, investors and traders should be prudent about making investments in them. Crypto Futures is even newer as they have primarily emerged post-2017. However, it is definitely one of the safer and easy to understand investment options within the crypto realm.

As an investor, you always have the option of conducting your investment transactions on your own. For instance, if you are an investor in the UK, you can simply buy bitcoin from UK websites that offer the option of bitcoin trading and investments. Alternatively, you can also appoint a crypto trader to manage your investments, considering that there is a lot of ambiguity in understanding cryptocurrencies. 

But first, we will look at what are crypto futures, to establish some basic understanding.

What are Crypto Futures?

Cryptocurrencies open up avenues for more than one kind of investment and trading, and one of those many use cases is crypto futures trading. Crypto futures are basically a great way to start trading in cryptocurrencies without having to hold any. 

A great and popular example, which has taken over the crypto realm is that of Bitcoin Futures. The underlying principle of crypto futures is market speculation, which is, of course, the foundation of the traditional futures markets. In the traditional setup, investors buy futures associated with companies’ stocks or commodities and speculate on how they are likely to perform.

Similarly, investors can speculate the future cryptocurrency prices and earn based on how accurate they are. Investors can opt for monthly contracts that allow them to get cash settlements instead of getting cryptocurrency delivered. One of the most popular platforms offering bitcoin futures contracts is Chicago Mercantile Exchange (CME).

Bitcoin Futures are of two types:

  • Fixed Maturity Futures: In this type of future, investors pay a stipulated amount as a premium in the beginning or as a free at the expiration of their contract.
  • Perpetual Contracts: In this type of future, you get a different pay structure, wherein you pay a fluctuating rate which resets about four times a day, every eight hours.

Both kinds of futures perform equally well, and the primary distinction between them is simply in their fee formats. With that in mind, we will now discuss how the process of investing in crypto futures works. 

How does Investing in Crypto Futures Work?

In general, crypto futures work so well because they provide a higher level of security and confidence to investors owing to the fact that exchanges that offer these services are regulated by the Commodities Futures Trading Commission. Secondly, since investment in crypto futures does not require investors to create bitcoin wallets, there is no physical exchange of cryptocurrency assets between the transacting parties.

The process of investing in crypto futures works quite similar to regular futures trading. The step by step process is as follows:

Step 1: Start an online brokerage or trading account on a platform that facilitates trading in cryptocurrency futures.

Step 2: Enter your personal details and wait for the online account to get approved.

Step 3: You can now choose the digital assets that you want to invest in or the futures in which you would like to start trading. 

Trading in crypto futures is as simple as following this step-by-step process and understanding the application of margins and leverage for successful trading. The leverage amount that trading platforms set can widely vary and should be one of the major foundations for your trading decisions. 

Moreover, the other major consideration is the margin amount, which is also the minimum collateral that has to be maintained in their account by the investor. Apart from this, the investor should consider the contract details in order to ensure that the payment terms are clearly defined.

Being diligent about reading and understanding these details will help you make informed trading decisions.

Crypto Futures Trading Strategies for 2022

When you are investing in Crypto options, one of the first things you need to know is to consider the fact that investing in crypto assets puts you at 5X more exposure compared to traditional investments. So, you need to be more diligent and prudent about investing in crypto, especially if you are just starting out and have a moderate to low risk capacity.

Here are a few strategies that will help you manage your investments in crypto futures easier and more effective:

Cash-and-Carry Premium Arbitrage Strategy

Perhaps one of the most popular trading strategies for crypto futures, cash-and-carry has earned the trust of investors and brokers with good reason. This risk-free strategy takes a very market-neutral approach and reduces the risk exposure for investors significantly by anticipating all kinds of market movement.

In this strategy, the primary thing you do is monitor the difference between the current spot price of bitcoin and the price of Bitcoin Futures contracts. To use this strategy successfully, you should be keeping track of the percentage difference every day. 

Next, an arbitrageur will make two purchases — a long position in bitcoin and a short bitcoin futures contract at a price that the investor would find expensive. The long position would essentially be a direct investment in Bitcoin. 

With this approach, one of the first things that you will notice is that the price of the futures contracts is more volatile than the direct investment in Bitcoin, hence it is also of higher value. When the contract expires, investors can pay off the spot price using the bitcoin that they are holding and the difference between this and the price of the futures contract will be your profit.

Inter-Exchange Premium Arbitrage Strategy

The inter-exchange premium arbitrage strategy is all about making a profit with the help of the variability that occurs in the prices of the futures on different exchanges. Assessing the price gaps between bitcoin futures on different exchange platforms can be a great way to earn profits. However, there are a few additional risks to be considered in this context.

To carry out this strategy effectively, investors need to monitor trading pairs across exchange platforms regularly. Very often, investors find that certain trading pairs are more overpriced compared to the others. Some investors even prefer to compare three trading pairs to make this strategy even more effective, which is also known as intra-exchange triangular arbitrage.

While there are many Dapps out there that can help you navigate this process seamlessly, many traders prefer to create custom scripts so that they can monitor assets across multiple platforms. Taking such steps, both traders and investors can automate the process of asset monitoring and maintain its accuracy.

One of the major drawbacks or rather a challenge of this strategy is that it is a time-sensitive one, and investors would need to pay close attention to transfer times, and transaction fees on each platform. It is also important to ensure that the exchange platform being considered for the transaction is not experiencing any major lags or delays in deposits or withdrawals.

Apart from the two strategies that we have discussed so far, there are two other lesser-known strategies that seasoned investors and traders use while investing in futures. Considering the high volatility of crypto markets, the next two strategies are for people who are in it for the long haul.

Long Straddle Strategy

Before understanding how the long straddle strategy works, start by getting to know what a straddle strategy is. Straddle essentially requires you to make two transactions on the same asset with opposing positions, intending to offset the risk factor. 

When you are using a long straddle strategy for your investments, you would essentially be buying a call option and a put option on assets with the same expiration and strike price. Considering the volatility of crypto assets, this strategy is highly effective in ensuring that the investor can earn some money, regardless of whether the crypto prices go up or down. 

This works great for investors because the upside equals the strike price plus two premiums paid, and the downside will be the strike price minus a premium. Essentially, this makes the long straddle strategy a directionless strategy and ensures that the investor can break even, even before the expiration.

Golden Cross/Death Cross Strategy

The golden cross strategy has a lot to do with understanding moving averages (MAs) and using them to conduct your investment decisions. The moving averages suggest the performance of an asset over a defined period, giving investors a comprehensive view of its performance in the long haul.

Since this strategy requires you to monitor the performance of your desired asset over a long period, it is most definitely a long-term strategy. The golden cross strategy is known so, as it requires investors to find crossovers between the moving averages. Considering the volatility of digital assets such as cryptocurrencies, this means you would be looking at a crossover between 50 MA which is averaged over 50 days and 200 MA which is the average over 200 days. 

Essentially, you will be looking at two specific crossovers

  • Convergence: Also known as the golden cross; this happens when the 50 MA overtakes the 200 MA
  • Divergence: Also known as the death cross; this happens when the 200 MA falls below 50 MA

Convergence in the market performance is a buy signal and means that the buyers are returning to the market, which is driving the short-term performance to exceed the long-term performance. A divergence in the market scenario is the exact opposite and suggests that the long-term performance has taken a nosedive, to fall below even the short-term volatile averages.

This strategy can indicate the consistent performance of the cryptocurrencies that you are making speculation about and help you make more calculated and risk-free investment decisions.

Summing Up

Over the years, cryptocurrencies have gone from being ambiguous digitization of currency to becoming lucrative investment opportunities. With that said, cryptocurrencies do come with their share of complications and volatility. Today, an array of investment options are open for investors to explore and capitalize on, in the world of crypto. 

With a defined approach and a set strategy in mind, individual investors, as well as traders, can benefit from the surge that cryptocurrencies are currently experiencing. Moreover, one of the best things about investing in crypto futures is that investors c

an start with minimal efforts, and gain significant exposure and experience in the crypto market in no time.

Author Bio Harsh Agrawal is the Founder of CoinSutra,  an online resource helping everyone to learn about decentralized finance and get started with it. Harsh is an international speaker and author who loves blockchain and the crypto world. Harsh is featured on Forbes, Microsoft, IBM, INC, and many well-renowned publications. Connect with Harsh Agrawal on Twitter at @denharsh.