bitcoin margin trading vs. futures trading

TL;DR

Trading margin on Bitfinex, Poloniex or Kraken is too expensive because you pay daily interest cost. The rate can only be locked in 1 until 30 days max. For long term trades you will be bleeding fees and can rekt you if price moves against you. Imagine paying an interest of 0.1% or higher every day.

Switch to trading future contracts on Bitmex or Deribit. There’s no daily cost of interest.

Most traders started buying their first bitcoins on their local bitcoin exchange. For me it was a Dutch bitcoin exchange called bitonic.nl but for a lot of people it might have been mtgox, kraken or coinbase. We basically transferred money to buy bitcoins directly. That’s a “spot transaction”. You are basically buying or selling “on the spot” .It’s the most simple type of trading.

A lot of traders from my time, 2013/2014 started to move to margin trading. Which is borrowing money from another person and then buying or selling bitcoins with borrowed funds on the same spot exchange. This also allows you to make profit if the price of BTC goes down.

This is the most “advanced” type of trading which is to buy or sell a financial contract that settles based on the BTC price at a predetermined moment in the future.

Spot Trading

Now imagine BTC is at $100 (as example). You buy 1 BTC and the price moves up 10%. You made a $10 profit or 10% gain with spot trading.

With margin trading, imagine you have $100 and the exchange allows a leverage of 3.3x and your initial margin will be 30%, now you can borrow an additional $233 for a total buying power of $333, so you can buy 3.33 BTC. When the price goes up 10% your profit has tripled to $33 or 33.33%. Using leverage can increase your return.

Initial margin is the minimum amount of Bitcoin you must deposit to open a position.

But with margin trading, there’s an interest rate applied! For example, the daily interest rate can be 1%, your daily interest cost will be $2.33. This interest rate is a variable rate and you will be only able to lock it in for 1 up to 30 days. If you are looking for a long-term trade, the cost of holding your position can destroy you. Especially if the price of bitcoin starts moving against you.

The third type of trading is futures trading. Most exchanges for future contracts require you to deposit BTC and don’t accept fiat currencies. Assume you have 1 BTC ($100 worth of equity). Assume that each contract is worth 0.01BTC (multiplier). 1 contract is worth 1 BTC at a $100 and the exchange can easily give you 25x leverage, which means you have to place 4% down as your initial margin. Which means you have a buying power of 25 contracts (equity / initial margin). The same 10% price change can make you a profit of 2.5 BTC or a 250%. Because of the higher leverage, you can generate a higher return, however you can also generate higher losses. A 4% price change against you and you will lose that 1 BTC you deposited. So be careful with using higher leverage. Stick to 3x or 5x leverage max.

But what’s the advantage over margin trading?!

There’s no daily cost of interest. The futures contract will either trade at a premium or discount. When you place a trade on a futures contract, you will know exactly how much interest you will be paying over the life of the contract.

Exchanges

An exchange with margin is where you can trade with leverage but you will pay a daily interest rate and bleed paying fees. The most popular exchanges are Bitfinex, Poloniex and Kraken.

An exchange with futures are exchanges where you buy/sell contracts and know exactly with the cost is over the life of a contract. Usually much cheaper than margin and due to the structure of futures, they offer insanely high leverage, low fees and potentially several magnitudes more profit.

The most popular and well known is exchange to trade future contracts is Bitmex. They also offer a perpetual swap (contracts never expired but there’s a funding fee). It’s the most liquid exchange, does not require KYC at all and 100x leverage.

Join Bitmex and receive a 10% discount: https://www.bitmex.com/register/vhT2qm

On Bitmex, you will automatically use the perpetual swap. Switch to futures.

Bitmex futures

Deribit is an exchange in The Netherlands in Amsterdam. I assume that “Deri” stands for Derivatives and “bit” for bitcoin. Deribit offers Bitcoin futures and Options. It’s a reliable exchange and I’ve been in their office a couple weeks ago. Deribit is the fastest exchange and will not give you Shitmex well known “Order submission error” due to high traffic. The exchange is written in the programming language Erlang. If I remember correctly, they can handle 100000 concurrent users on their platform without any crazy delays like on shitmex. 1 MS trade order confirmation and 50x leverage.

Trading on Deribit is cheaper than trading on shitmex. Do not trade options on shitmex, because on shitmex the so called up/down-contracts are manipulated in a way that they can only be sold by the shitmex market maker. If there’s only 1 party selling something: where is the fair price? Because of that Options tend to be priced much better at Deribit

It has less liquidity than shitmex (for now) but it’s great for the small/medium sized trader to fill their orders. I expect much more liquidity when they add perpetual swaps. I did hear some rumors they are about to launch a perpetual contract as well soon

10% discount: https://www.deribit.com/reg-572.9826

Deribit futures

Another exchange to trade futures is Okex. KYC verification is required to fully access the features of OKCoin International. You may apply for an individual or corporate account. With KYC level 2 you can deposit USD to your account. However, I’m not using this exchange.

One of the newer and most fastest-growing exchanges.

https://www.bybit.com/en?affiliate_id=6776&group_id=1653&group_type=1

https://www.bybit.com/en?affiliate_id=6776&group_id=1653&group_type=1

Perpetual Swap?

Futures trading