Swap trading strategies
The interest rate or basis trades I will describe below all take advantage of higher Eurodollar interest rates in Bitcoin. The interest rate on these Eurodollars swap trading strategies high mainly because of counterparty risk. Traders on derivative exchanges would like swap trading strategies own more Bitcoin than they have cash to purchase. Market makers and arbitrageurs who are usually short Bitcoin, hedge themselves by purchasing it swap trading strategies USD held on the underlying exchanges.
These traders supply USD to speculators for a positive rate of return. This interest or basis compensates them for counterparty risk and the opportunity cost of capital. The three basic basis strategies I will describe below allow traders to capture this basis as profit.
Swap trading strategies, it is necessary to have an elementary understanding of the futures and swap contracts that BitMEX offers. The buyer or seller is entitled to the difference between the entry and settlement price at maturity. Buyers swap trading strategies sellers pay and receive fixed interest rates depending on whether the basis is positive swap trading strategies negative respectively at entry.
Basis is the difference between the futures and spot price. This derivative is similar to a futures contract, but there is no settlement date. Traders are free to hold their position for as long as their capital allows. To anchor the swap price to the underlying spot price, interest rate payments are exchanged between longs and shorts depending on whether the swap is trading at a premium or discount. A swap contract is an exchange of floating interest rate payments for price performance.
This is the simplest basis swap trading strategies. This strategy is commonly called cash and carry. Basis can be positive or negative, but usually futures trade more expensive than spot. The remaining Bitcoin you should store yourself in a properly secured Bitcoin wallet. If the XBTH17 price swap trading strategies, your position is at risk of being liquidated. If you are completely comfortable with BitMEX counterparty risk, then deposit the full Bitcoin value.
By using 1x leverage, you cannot be liquidated. Otherwise you will have to monitor your liquidation price and occasionally top up your BitMEX account. The basis captured is your profit. You must hold the trade until XBTH17 expires to realise the full amount. This has become a very popular trade due to the historically positive funding rate.
A positive funding rate means that longs pay shorts every eight hours. Swap trading strategies is impossible to know the exact amount of profit before entering the trade. This is because the funding rate changes every eight hours.
This is the definition of being long a floating rate instrument. As mentioned earlier, over the past nine months, this strategy yielded a positive The funding rate can and does go negative. When the funding rate goes negative, you lose money. Depending on when you enter the trade, you could experience long periods where you pay funding every eight swap trading strategies. During prolonged periods of negative funding, many traders unwind the position rather than continue to bleed.
Bitcoin has been in a bull market since this product was launched, swap trading strategies will be interesting to observe the funding rates during a prolonged sideways or bear market. This is the most advanced strategy I will present today. This is a fixed vs. Unlike the swap trading strategies two strategies, the performance can be swap trading strategies using leverage on both legs of the trade. This is referred to as a curve flattener.
You will employ this strategy when the XBTH17 basis is already negative but you expect it to decline even further. Selling XBTH17 at a negative basis means you bleed money each day until expiry aka negative carry or negative theta.
I tend to avoid any situation where my fixed interest leg is entered into at negative carry. It makes turning an eventual profit more difficult. This type of trade is also a bearish swap trading strategies with respect to Bitcoin spot movements.
During a quick and sharp swap trading strategies, traders will short futures and swaps. In this situation, profits due to movements in interest rates will accrue on both legs. This is referred to as a curve steepener. If the futures basis rise is greater than the interest paid being short swap, either due to time decay or an outright movement in the implied interest rate, you make money. You will employ this strategy when the XBTH17 basis is already positive but you expect it to rise even further.
Buying XBTH17 at a swap trading strategies basis means you bleed money each day until expiry. This type of trade is also a bullish trade with respect to Bitcoin spot movements. During a bull market, traders will buy futures and swaps. The interest rate differences captured are small. In order to earn a respectable return on equity, leverage must be employed. Each leg must be margined separately. The one benefit to curve trades is that you do swap trading strategies need to hold until expiry of the futures contracts.
You can go one way, then reverse quickly as swap trading strategies change. In this way, you become an interest rate day trader. Speculating on curvature is more difficult, but there are less people employing such strategies. Those who understand the mechanics will be presented with many no-brainer profit opportunities.
Swap trading strategies a curve flattener, you are long swap. If the total net swap funding payments i. For a curve steepener, you are short swap. In general, when the futures basis is positive, longs pay and shorts receive swap funding. When the futures basis is negative, longs receive and shorts pay swap funding. This is because traders will arbitrage the two products to keep the interest rate swap trading strategies in line.
Profiting from this strategy requires excellent foresight into how the interest rate curve will move. The most important part of the three strategies that I outlined is that none of them take any Bitcoin price risk. Bitcoin to basis traders is just swap trading strategies asset with an interest rate curve that can be arbitraged.
This curve becomes distorted during highly leveraged speculator induced spot price moves. This allows savvy traders to earn excellent volatility adjusted returns.
Spot This is the simplest basis trade. Sell 1, contracts of XBTH At expiry, sell the remaining physical Bitcoin. Profit Potential The basis captured is your profit. Spot This has become a very popular trade due to the historically positive funding rate. Unwind the trade when you believe funding will turn negative for an extended period of time. Margin The margin considerations are the same as with the previous trading strategy.
Profit Potential It is impossible to know the exact amount of profit before entering the trade. Risks The funding rate can and does go negative. Swap This is the most advanced strategy I will present today.
Buy Swap Mechanics This is referred to as a curve flattener. Sell 1, XBTH17 contracts. Buy 1, XBTH17 contracts. Profit Potential The interest rate differences captured are small. Risks For a curve flattener, swap trading strategies are long swap. Conclusion The most important part of the three strategies that I outlined is that none of them take any Bitcoin price risk.