Cryptocurrency futures trading is a relatively new investment vehicle. The first crypto futures exchange was launched by BitMEX in January 2014. Therefore, the industry is filled with many novice traders who aren’t familiar with all of the various trading strategies that are available on a crypto futures exchange–such as shorting crypto futures. Let’s review the types of trades that can be placed on a futures exchange, and how taking advantage of options like short selling bitcoin can help you profit even in a bear market.
Trading on Futures Exchanges
Futures trading is uniquely different from the trading of traditional assets like stocks and bonds. Investors who participate in the trading of stocks and bonds are limited to the “long side” only. In other words, these traders can only speculate on rising prices, rather than having access to both long and short futures.
For example, let’s assume Jane believes the price of an IBM corporate bond is overvalued. Jane doesn’t have the option of “shorting” the bond in order to profit from falling prices. Instead, Jane’s only investment option is to simply avoid purchasing the IBM bond if she feels as though the security is overvalued. There is no trading vehicle which allows Jane to “short” the corporate bond.
In regard to shorting stocks, it is technically possible to profit from declining stock prices. However, it’s a rather complicated process that most traders are not willing to undertake.
As an example, Bill thinks the stock price of GE is overvalued. He expects the stock to decline in value during the next few months. If Bill wants to short GE, the first step is to establish a margin account with his brokerage firm.
Additionally, Bill is required to borrow shares in his brokerage account from a trader who is long GE. While Bill is short the GE stock, he must pay any dividends that are issued by GE. As you can see, shorting a stock is not an easy process. This explains why most investors are unwilling to participate in short selling, even if they believe a specific stock is overvalued. It’s simply not worth the effort.
Short Selling Bitcoin Futures
Thankfully, for those of us involved in crypto futures trading, there’s no difference between buying and selling a cryptocurrency contract. In other words, buying a futures contract is just as easy as selling one and it’s possible to both long and short futures on the crypto market. The process is exactly the same.
Many newer members of the crypto community are unaware that it’s possible to generate a profit from falling cryptocurrency prices using a short futures contract. Let’s review an example using the contract specifications from the Digitex Futures exchange.
In our example, Amy is bearish on the price of Bitcoin (BTC). She believes the price of BTC will decline and is interested in short selling bitcoin. Amy has an account with Digitex and she knows how to short sell bitcoin. Her account is fully funded with DGTX tokens, which is the unit of account used to trade on the Digitex exchange.
The current value of BTC is $3,580. Amy sells 250 BTC/USD futures contracts at $3,580. She is short 250 contracts in her account. Amy will generate a profit if the price of BTC declines.
Amy’s bearish price forecast is correct. Over the course of the past five days, the price of BTC has fallen from $3,580 to $3,160. The tick size of the BTC/USD futures contract is $5. Therefore, Amy has made 84 ticks per contract (420 / 5).
She is short 250 contracts. As a result, she has a net profit of 21,000 ticks (250 x 84). One tick is worth one DGTX token. Amy has a profit of 21,000 DGTX from short selling bitcoin. The current price of DGTX is $0.055. In dollar terms, Amy’s profit is $1,155 (21,000 x .055).
Thankfully, Amy is trading on the Digitex exchange. There are no fees or commission expenses. Therefore, Amy will keep 100 percent of her profit. She will not have to share any of her profit with the exchange or a commodity broker. This is the benefit of trading with Digitex.
Let’s review another trading example. Amy continues to remain bearish on Bitcoin. Therefore, she decides to short BTC/USD. However, instead of using her Digitex account, Amy’s decides to place the trade in her BitMEX account. The current value of BTC is $3050. Amy sells 10 BTC/USD futures contracts at $3050. She is short 10 contracts in her account. Amy will generate a profit if the price of BTC declines. Amy’s bearish price forecast is correct.
Over the course of the next ten days, the price of BTC falls from $3050 to $2680. Amy buys back her short futures contracts at $2680. The tick size of the BitMEX BTC/USD futures contract is $0.50. Therefore, Amy has made 740 ticks per contract (370 / .50). She is short 10 contracts. As a result, she has a net profit of 7,400 ticks. One tick is worth $0.50. Amy has a gross profit of $3,700.
Unfortunately for Amy, BitMEX is not a commission-free exchange. BitMEX charges maker fees and taker fees for long and short futures. Both of Amy’s futures orders were “market” orders. Therefore, Amy was charged a taker fee of 0.075% because she was taking liquidity from the market. Amy originally sold 10 contracts at $3050. Therefore, her taker fee is $22.88 (3050 x 10 x 0.075%). She bought back the contracts at $2680. Amy’s taker fee is $20.10 (2680 x 10 x 0.075%).
Her total commission charge is $42.98. Amy’s net profit is $3,657.02 (3700 – 42.98).
If Amy was trading in her Digitex account, the net profit would have been $3,700. Why? Because Digitex is a commission-free exchange and does not charge a fee for buying a futures contract or trading futures. In regard to custodial services, BitMEX is acting as the custodian for Amy’s account. Therefore, BitMEX has control of her entire account balance. Digitex, on the other hand, does not have a custodial relationship with any customer accounts. Consequently, the customer has complete control of the funds in her/his account.
Of course, nobody likes a bear market. Bull markets are much more enjoyable. However, at least the cryptocurrency futures industry and different trading strategies for cryptocurrency allows us the opportunity to potentially generate a profit while we wait for the bear market to end. Once you learn how to short sell bitcoin, you may not mind the bears so much. And Digitex will provide a perfect futures exchange for placing trades during the bear market.
Throughout my trading career, I’ve never found a firm so dedicated to customer service as Digitex. During the development phase, they have been tirelessly searching for ways to provide a better user experience for the customer.
For example, Digitex has a dedicated team available on Telegram to answer questions and provide information about buying a futures contract or any other function of the platform. Additionally, the firm constantly provides its customers with fresh content through the Digitex blog and Twitter account. Check it out!
It’s not too late to get Early Access to Digitex when the company launches its commission-free exchange. The launch date is scheduled for January 15. You don’t want to miss this opportunity to participate in the first ever zero-fee cryptocurrency futures exchange. This is an exciting time for Digitex and the entire cryptocurrency industry.
Digitex Futures writers and/or guest authors may or may not have a vested interest in the Digitex Futures project
and/or other businesses mentioned throughout the site. None of the content on Digitex Futures is investment
advice nor is it a replacement for advice from a certified financial planner.