During this recent phase of volatility in the Bitcoin market I’ve begun experimenting with the futures at OKCoin. While I’m told most true Mooninites and Hodlers use full 20x leverage I’ve found no reason to go beyond 10x. It is still an attractive prospect to those that want to put entire accounts on the line to “win the lottery.”
I wanted to see what I could learn about the differences between the prices of the two at any give time. Through observation I gathered a few bits of information:
1. Quarterly futures almost always trade at a premium against spot price. Typically 2.5%
2. Observation 1 becomes untrue in bearish conditions reaching parity and temporarily dipping below by < 0.5%.
3. Price movements are exaggerated in futures ; bullish and bearish .
4. Futures price movements are more correlated to BTCCNY than BTCUSD .
5. Futures price sometimes leads spot price.
From these observations I thought about two trading strategies. The first would deal with arbitrage in calculating the mean differential and using automated trading to take advantage of deviations in the premium. This would have to be automated and I am certain someone else already has advanced bots doing the work already.
The second, more useful strategy for the human investor is to look for divergences on the swing timeframes. In this example I went back through the last bull run and analyzed the 4 hour chart for moments of consolidation. In two cases, on May 23 and June 10, BTCUSD spot price was in a tight range that broke the spot price high after the futures had broken their high.
Going back farther on the chart I did see examples of false breakouts where futures broke their high but then neither instrument moved out of consolidation. There are also many examples of BTCUSD spot breaking its high at the same time futures break theirs which was not a divergence. This strategy is also only useful in periods of bullishness due to the typical forward looking premium so opportunities will be scarce.
By incorporating additional technical analysis (price patterns or indicators) these divergences can serve as extra confirmation of bullish breakout opportunities.