What is this?
This chart is offering a look at the behavior of the Bitcoin Futures premium and how it tends to behave. The chart in the top position is a symbol I use to track the premium of the front month futures contract over the Perpetual futures (as a proxy for spot). In this case, the front month contract are the June futures, so the symbol is: FTX:BTC0625-FTX:BTCPERP ...
I'm using the FTX futures, but you can substitute your exchange of choice - just make sure you're comparing two series from the same exchange. The important thing to understand is that the symbol is calculating the difference between the two prices.
Why should I care?
For the uninitiated, futures contracts exist as a tool to hedge risk in any given market. Therefore, by paying attention to futures spreads, you can get a more incisive feel for how the market is acting. You can learn if people are willing to pay more (or less) for a product at a future date, and by how much; the utility of this information comes more into focus by comparing it to previous cycles.
During the previous two cycles, the spreads were much tighter. In the March cycle, the spread was testing a maximum of +5% over spot buy for most of it's life was averaging closer to 2-3%. In December it was even smaller, living mostly around +1%. As you can see, the current cycle has oscillated between +5% and +10%, as evidenced by the regression channel. For an even more in-depth comparison, the spread during the 2017 bull market peaked out at about +10% as well, so we're in a similar environment now. What I'm finding interesting today is that the spread is threatening to close the session outside of the channel and even went negative over night!
That's nice, but what can I do about it?
Trade it! I've had a fair amount of success trading the spread outright over the past year by going buying one contract and selling the other in accordance with the price action. This can be a bit ungainly though because the spreads tend to move fast and you have to leg out of the trades because the order execution on most of the platforms isn't up to par. There are pro's and con's to consider... trading the spread is a great way to put on high probability trades with minimal margin risk, but expect to experience frustrating amounts of slippage.
The other thing you can do is use it as a directional indicator. The chart at the bottom shows how the futures premium leads price spot price time and again. I haven't found a way to reliably forecast the magnitude of what the corresponding move in spot will be, but the spread tends to oscillate around the price. When it gets too high, the spread contracts. Selling in the futures then leads to selling in spot, and vice-versa. Just be advised that we're in an extremely extended market environment. Spreads can and will go negative, so needless to say, there's a lot more risk to the downside.
This chart is offering a look at the behavior of the Bitcoin Futures premium and how it tends to behave. The chart in the top position is a symbol I use to track the premium of the front month futures contract over the Perpetual futures (as a proxy for spot). In this case, the front month contract are the June futures, so the symbol is: FTX:BTC0625-FTX:BTCPERP ...
I'm using the FTX futures, but you can substitute your exchange of choice - just make sure you're comparing two series from the same exchange. The important thing to understand is that the symbol is calculating the difference between the two prices.
Why should I care?
For the uninitiated, futures contracts exist as a tool to hedge risk in any given market. Therefore, by paying attention to futures spreads, you can get a more incisive feel for how the market is acting. You can learn if people are willing to pay more (or less) for a product at a future date, and by how much; the utility of this information comes more into focus by comparing it to previous cycles.
During the previous two cycles, the spreads were much tighter. In the March cycle, the spread was testing a maximum of +5% over spot buy for most of it's life was averaging closer to 2-3%. In December it was even smaller, living mostly around +1%. As you can see, the current cycle has oscillated between +5% and +10%, as evidenced by the regression channel. For an even more in-depth comparison, the spread during the 2017 bull market peaked out at about +10% as well, so we're in a similar environment now. What I'm finding interesting today is that the spread is threatening to close the session outside of the channel and even went negative over night!
That's nice, but what can I do about it?
Trade it! I've had a fair amount of success trading the spread outright over the past year by going buying one contract and selling the other in accordance with the price action. This can be a bit ungainly though because the spreads tend to move fast and you have to leg out of the trades because the order execution on most of the platforms isn't up to par. There are pro's and con's to consider... trading the spread is a great way to put on high probability trades with minimal margin risk, but expect to experience frustrating amounts of slippage.
The other thing you can do is use it as a directional indicator. The chart at the bottom shows how the futures premium leads price spot price time and again. I haven't found a way to reliably forecast the magnitude of what the corresponding move in spot will be, but the spread tends to oscillate around the price. When it gets too high, the spread contracts. Selling in the futures then leads to selling in spot, and vice-versa. Just be advised that we're in an extremely extended market environment. Spreads can and will go negative, so needless to say, there's a lot more risk to the downside.