August 30, 2021

How to Use BTC Futures to Generate Income

The lion's share of traders believes that futures are good only for ultra-risky bets with high leverage. In fact, they have many and varied applications (find out about the reasons to use this tool in our article).

When newbies hear about the liquidation of a futures position, they think that it comes to participants using large leverage or other risky tools. Of course, some platforms for trading derivatives are often guilty of pushing users to high leverage. Nevertheless, this pattern isn't general across the whole market.

Perhaps it was due to investors' concern about how platforms handle excessive volatility by offering generous leverage, Binance reduced the leverage for futures to 20x. Later, FTX did the same (a detailed overview of the exchange is waiting for you here).

As a rule of thumb, 5% volatility of virtual currencies results in the liquidation of positions with 20x (or more) leverage. In this regard, we have prepared three strategies that are often used by successful and experienced traders.

Cold Wallets

A slew of crypto fans is aware of the benefits of storing assets on such wallets. The devices that aren’t connected to the internet represent the staple of security. To illustrate an entirely different point, there is a chance that the position will not be on the exchange at the right time, especially if the network is overwhelmed.

That is why futures are the first choice for those who have decided to reduce their position during strong price fluctuations in the market. For example, by investing a small margin, an investor can use it in 10x and reduce the net risk.

Such traders have a chance to sell their positions on spot exchanges later when their trade works, and at the same time close the short. Those who want to suddenly increase positions using futures should choose the exact opposite path. The derivatives position will be closed when the money is on the spot exchange.

Cascading Liquidation

People that hold big amounts of crypto know that liquidity is drying up in a turbulent market. As a result, some users open positions with a large portion of borrowed funds, hoping that they will be canceled due to insufficient margin.

Despite the fact that they "obviously" lose money on the transaction, their real motivation is a forced cascading liquidation in order to have an influence on the market. But don't forget that this will require impressive capital or even a couple of accounts.

Profit from the"Funding Rate"

Perpetual contracts have an embedded rate that is charged every 8 hours. The funding rate is responsible for the lack of currency risk. Although the amount of open positions of buyers and sellers is always the same, the leverage used may differ.

When buyers (long) demand more leverage, the funding rate becomes positive. Therefore, they will pay a commission.

Market makers and arbitration services will monitor these rates all the time and eventually open a position with leverage to collect such commissions. It sounds quite simple, but these traders will have to hedge their positions by acquiring (or selling) assets on the spot market.

Bottom Line

If you are ready to try your hand at derivatives, you need knowledge, experience, and, in a perfect world, an important capital to withstand periods of volatility. Nevertheless, now you see that you can use leverage without being an irresponsible trader. Good luck!

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