What is the new way to trade crypto and signal to watch? The crypto trading has evolved significantly just as the crypto space has evolved over the years.
In the current scenario, it may not be enough to follow the traditional approaches to be successful in crypto trading.
You will need to keep a close watch of different trading signals and indicators that will help you to plan your next moves well in advance accordingly.
This will help you to forecast the future and the upcoming trends and be knowledgeable about the latest developments, missing out of which may result in some irrecoverable losses.
Therefore all professional and successful crypto traders are always on the lookout for newer and better ways to trade.
If you are unaware of them but want to implement such better and proven techniques in your trading efforts, you are in the right place fortunately.
This article will let you know how and why the extreme volatile nature of Bitcoin and Ether impacts crypto trades and what is the need for an increased awareness of trading basis in crypto.
Trading basis is, in the simplest form, the difference between the current market price or spot price of the crypto coins and the market price of the futures contracts with that particular coin underlying.
Though crypto futures contracts allow users to trade more effectively to earn profit safely without needing to own the actual coins, you will need to be cautious in your approach which needs little explanation why.
Therefore, Basis Trade at Index Close or BTIC is extremely necessary especially today when crypto traders not only deal with conventional crypto coins but also crypto futures contracts.
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What is the New Way to Trade Crypto and Signal to Watch?
The crypto space witnessed a notable drop in the prices of its products, which was in fact half of the original prices, in March 2020 due to the pandemic situations which overturned the global economy.
The crypto market also witnessed acute backwardation as Bitcoin was sold off but at the same time the market also offered crypto futures trading at a huge discount.
With the crypto futures gaining popularity, the year next happened to be equally volatile with steep upward climbs and sharp falls in the prices of both Bitcoin and Ether being noticed.
One of the most significant developments of 2021 was the CME Bitcoin futures contracts that typically traded at a premium to the prevailing market price of Bitcoin.
However, in June 2021 it recoiled with a significant selloff.
This had a significant impact on the crypto scene and the traders started to follow trading basis in crypto for the most part.
In this way of trading crypto, the traders are allowed to purchase Bitcoin from the spot market and sell them as long-term futures at a later date.
This process allows them to lock in the difference between the two prices, futures market price and spot market price, which, as said earlier, is the trading basis.
The users found a better and newer way to trade crypto through the BTIC or Basis Trade at Index Close transactions.
The BTIC allows the traders to bridge the gap between the spot price of a crypto coin with the futures market price corresponding to it.
In this new form of basis trading in crypto you are allowed to buy a crypto at the spot price by taking a long position.
At the same time, you will also be allowed to take a short position via the crypto futures contracts trading or other forms of derivatives such as options trading.
When you go long or short on any futures contracts it means that you will be able to lock in the selling price or the forward buying price of the futures contract.
This is usually done only when you intend to hold the futures contract till its date of expiry.
The trading basis in crypto is changing continuously.
This happens due to the changes in the spot prices of a crypto coin due to the changes in its demand and supply.
When the demand for a coin is high and the supply of it available in the market is relatively small, there will be a rise in the spot price in comparison to the futures prices.
This will result in strengthening the trading basis further creating a positive basis.
On the other hand, the trading basis will be negative if the converse happens where the futures price is higher than the spot price trading.
On the flip side, if the demand for a crypto coin is pretty small in comparison to the available supply of the coin in the market, the larger supply will result in the fall in the spot price of that particular coin.
On the other hand, the price of the futures contracts will be higher. This will weaken the trading basis.
As of now, the crypto futures market is in contango which means that the prices of the futures contracts are higher in comparison to the spot market prices.
As said earlier, the trading basis may change due to the changes in the demand and supply of a coin but the spot price and futures contracts price will never converge to zero on expiry in such situations.
This will only happen when you use arbitrage.
However, there is no scope of complacency for the crypto traders, speculators, and hedgers.
They have to keep a close watch on the shape of the futures contracts curve so that they know exactly where the prices of the futures contracts are heading.
This is the best signal that the traders should have to follow in order to trade crypto more confidently in the best possible way.
Trading Basis
Ideally, the price of a crypto futures contract is calculated on the basis of the current price of the coin and the cost of carry that is involved during the period before the underlying asset of the futures contract is delivered to the contract holders.
This cost of carry involved in the futures contracts is signified by the basis.
The role of BTIC in crypto trading is to allow the users to trade the crypto futures contracts at the BRR or Bitcoin Reference Rate or at an unchanging spread to the closing underlying index level.
The closing underlying index level for the CME Group crypto products however refers to the regulated and transparent CF Reference Rates on Bitcoin and Ether-Dollar Rate of the CME.
As for the traders, the working process of the BTIC transactions involves an agreement between two parties to trade crypto futures contracts just like traditional futures contracts.
However, the only difference in it is that the parties involved in the transaction do not agree to trade them at a specific price.
Instead, they agree to do so at a basis or a fixed spread. This is then added to the reference of that particular day in order to find out the price of the crypto futures contracts which forms the basis.
However, this basis is established before the index level of that day is known.
On the other hand, the purpose served by the trading basis in crypto is a little different for the crypto miners.
As you may know, in crypto mining, the connection between the spot price and the futures price plays a very important role in informing their hedging decisions.
The same is applicable in the case of the holders of a long position.
Typically, the basis helps the miners and the long position holders in determining the value of the hedging tactic.
In addition to that, it also helps them in looking for the best available arbitrage opportunities.
On the other hand, the crypto traders use this basis often to find out the best possible time to purchase or sell off a crypto asset in order to make maximum gains.
Ideally, the traders make these decisions of buying or selling the crypto coins depending on whether the trading basis is weakening or strengthening.
The traders may buy crypto coins from the spot market at a low price if the trading basis is weak and sell the off if it is strong since the demand of the coin will be high in the market in comparison to its supply.
Apart from the traders and miners, the BTIC may be very useful for a wide range of several other participants in the crypto market.
This includes the crypto ETF or Exchange Traded Fund providers who will find it extremely easy to manage the redemption or creation processes.
On the other hand, it will also help the structured product desks to hedge transactions much more effectively as well as the relative value desks in trading the Bitcoin basis more precisely.
And, finally, the institutional traders will also find it much more effective and easy to transfer the risks between the futures market and the physical Bitcoin market when they use the trading basis.
Determining Factors of the Basis
There are different factors that determine the trading basis in crypto. Some of the major ones include and are not limited to:
- The value of the basis and
- The value of the spread.
On the other hand, how much this trading basis will be also depends on a few specific factors out of which the major ones are:
- The financing rate implied for the futures contracts
- The volatility aspect as perceived and
- The time remaining for the futures contract to attain maturity.
The BTIC transactions and orders come with their own characteristic tickers.
These unique tickers are very useful for all the participants of the crypto market because it provides them with price discovery as well as transparency on the spread.
It is also useful in the sense that it informs the crypto traders about the difference between the futures contract price and the underlying index level of the entire trading day.
Therefore, without any doubt it can be said that using trading basis in crypto, and more specifically the BTIC transactions, is extremely helpful and a more effective way to trade crypto assets today.
And, this is not restricted to the crypto traders only but can be used and the benefits offered by it enjoyed by all the different participants of the crypto market.
Are you wondering what the BTIC transactions and orders will be available and useful for? Well, it is available for:
- Bitcoin futures
- Micro Bitcoin futures and
- Ether futures.
The order book of the BTIC is open and available 23 hours a day and not 24 hours, mind you.
However, it is enough to allow price discovery in real time on the crypto futures basis.
You will find all the orders submitted by the market participants from all over the globe for a more precise price discovery alongside the relevant crypto coin reference rate.
In addition to that, if you happen to be an eligible future contract participant, you may even carry out the BTIC block trades.
This can be done around the clock and you can submit the blocks for clearing at some stage when you think that the clearing window is most suitable.
The Turning Points
The crypto market of late has had several turning points especially due to the use of the Bitcoin futures basis.
If you watch the market and its performance closely, you will be able to get an indication how exactly it has given the market participants an opportunity to harness the potential of the crypto market to the maximum.
And, it is all due to these turning points.
The intense contango of the market indicates its bullish high spirits which also indicates that the market is poised to reach to the top.
On the other hand, the backwardation of the market due to excessive selloff of crypto at times indicates the bearish sentiment of the market participants.
This, in turn, signals the prospective buying opportunities and the right time to get involved in the buying act.
Therefore, you will be very confident and be able to maximize your profit earning chances from the market if you look for these particular signals and use trading basis when you trade Bitcoin and Ether futures contracts today.
Conclusion
The BTIC mechanism today is the best way to trade crypto and make handsome profits by all types of market participants.
Whether you trade bilaterally or on-screen you will benefit in both ways while trading crypto future contracts.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.
