3 Techniques Traders Use Bitcoin Futures to Make Money

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Many traders think Bitcoin futures are only for making risky bets with high leverage, but there are more ways to use them.

Challenges on Futures Trading

When there's news about futures contracts liquidation, some new investors and analysts quickly think it's risky gamblers using high leverage. Some exchanges encourage traders to use too much leverage, but not all do.

Recently, people like Nithin Kamath, who is the founder of Zerodha, wondered how exchanges can handle big swings in prices while offering 100x leverage.

source: twitter

On June 16, Colin Wu, a journalist, said on Twitter that Huobi reduced the maximum trading leverage to 5x for new users. Later, the exchange stopped China-based users from trading derivatives. 

Binance Situation

Because of some rules and complaints, Binance Futures only lets new users trade with 20x leverage since July 19. FTX did the same a week later. They said it's to make trading safer.

FTX Situation

Sam Bankman-Fried, the founder of FTX, said most trades use only 2x leverage, so the change won't affect many people. It's not clear if regulators made them do it.

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Cointelegraph Suggestion

Cointelegraph showed before that even small price changes can cause big losses for traders with 20x or more leverage. So, here are three methods used by professional traders who are careful and confident.

1. Margin Traders Keep Coins Safe

Most investors know it's safer to keep coins in a cold wallet because it's harder to hack. But it can take longer to move coins from a cold wallet to an exchange, especially when networks are busy. That's why traders use futures contracts to reduce their risk during big price swings. They might put in 5% of their coins as a margin and use 10x leverage.

For Example

If someone has 10 bitcoins, they could put 0.5 bitcoins in a margin account and use it to make trades worth 5 bitcoins. This lets them make bigger trades without risking all their coins.

2. Making Liquidations Happen

During big market changes, liquidity can drop. Some traders, called "whales," open big leveraged trades on purpose. Even if they lose money at first, they hope their trades will force others to sell, pushing prices in their favor. Doing this needs lots of money and many accounts.

For Example

If a whale wants to make Bitcoin's price go down, they might sell a lot of Bitcoin at once. This can make other traders nervous and make them sell too. Then, the price goes down, and the whale can buy more Bitcoin at a lower price.

 3. Making Money from Funding Rates

Perpetual contracts charge fees every eight hours. These fees help keep things fair for both buyers and sellers. When buyers want more leverage, the fee goes up. So, buyers pay more fees. Traders watch these fees and might make leveraged trades to collect them. But they need to be careful and also trade in the regular market to balance their risk.

For Example

If someone sees that buyers are paying more fees, they might buy Bitcoin in the futures market. Then, they sell it in the regular market and make a profit from the difference in prices.

Conclusion

Using futures contracts needs skill and experience, and it's better if traders have a lot of money to handle big changes. But as shown, traders can use leverage safely without being too risky.

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Also Read

What is Financial Risk and its Types?

How to Manage the Risk of Loss in Crypto Trading

What is Return on Investment (ROI) & Factors that Influence it?

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.