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Why Bitcoin Might Be Better Then Futures


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Why Bitcoin Might Be Better Then Futures

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  #1 (permalink)
 tpredictor 
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I have been planning to run a study on why Bitcoin might offer more profit opportunity then even the futures markets. In the optimistic sense, we believe we have an edge. However, we have to be aware that we might not. In the case where we do not have any edge, the spread+commission+fees represents how far under the 50/50 bet we are. This is where things get a bit complicated, actually.

In the futures market, the minimum fluctuation is a tick. If we go to market both sides we must assume, in a worst case, we lost both sides of the spread or 2 ticks. It is said that the best games in Las Vegas offer almost a 98% to 99% return. In order to have such good return in futures without an edge, our minimum trade size must be 100 ticks. This is 25 points in the ES or clearly a quite large trade. The problem is: it is too large if we want to trade frequently and might offer less high probability too and at any rate is too large for many small traders.

So, all things considered a large tick size is a disadvantage. The only possible exception is where our trade costs are fixed. A large tick size might, if we under the assumption we capture the tick, help to offset our fixed costs. Now, one can trade Bitcoin with a spread of only .01 cents much of the time. However, the liquidity will vary.

The two sides of the equation are the spread and the volatility. The higher the volatility or the range then the greater the profit opportunity. In a perfect world, you would have a tiny spread to trade in and out at any time and a huge range to provide profit opportunity. Bitcoin spread is small and range is good. However, sometimes the spread can widen to several dollars even. The liquidity can be poor even though the spread is good-- but it again might not be an issue for most small traders.

The other side to the equation are the fixed trade costs. The fixed trade costs for Bitcoin when you go to market are probably high compared to futures. It .025% to market in and out at GDAX but you have less depth to buy. This translates to appx $12-$15 for $5,000-$6,000 of BTC. However, I would need to volatility adjust it to know for sure. It can also be more difficult to leverage Bitcoin at GDAX (at least), which is important as well. On the other hand, limit orders do not incur cost. However, we have to also consider that one isn't paying to trade a large spread in Bitcoin. I need to do the calculations but a range of $250-$300 per day doesn't seem unusual. A $15 spread will be equivalent to about .05% of $300 move while a $300 move would be equivalent to a 5% gain.


Let's look at our theoretical ideal:

Max granularity (trade any size, even very small)
Max leverage
Min costs
Min spread
Max liquidity (min volatility on HFT scale)
Max Range (volatility on human trading scale)
Long or Short
Fixed Risk

Futures: with rating 1 to 10 (1 being worst and 10 best)
Low granularity (must trade big size) POOR
Good leverage GOOD
Average costs AVERAGE
High spread POOR
High liquidity GOOD
Range is variable but over last several years volatility keeps dropping POOR

Bitcoin
High granularity (can trade small size) GOOD
Poor leverage at least at GDAX POOR
No cost for limits GOOD
Market costs Average to poor? AVERAGE?
Minimum spread GOOD
Variable liquidity POOR
Range GOOD
Can be difficult to short

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  #2 (permalink)
 rleplae 
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I think there are many other aspects to take into consideration
- counter part risk
- non-central but distributed exchanges
- not regulated, no rulebook

etc...

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  #3 (permalink)
 tpredictor 
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Everything else aside, traders need markets that are moving for opportunity. Right now, BTC is moving better then any market I've seen. Agree the risks are there and haven't found the best way to leverage this yet-- but any serious trader needs to take consider BTC.

I have a nagging suspicion that the books written by the trading gurus of tomorrow will have made their fortunes in Bitcoin.

Everybody talks about wanting markets that trend and/or that are volatile. A market that trends from basically a few dollars to $500. A market that trends from $200 to $6000.

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 ScalperBAX 
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  #5 (permalink)
 mattz   is a Vendor
 
 
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@tpredictor No mention of how Ether went from $320 to 10 CENTS in a flash crash?
No mention that this market that has no regulation, no market making accountability, and each exchange makes its own prices? Counterparty risk -- (mount GOX)? The DAO?

One more thing, if Bitcoin has the notional value of ES now, you would pay $312 PER SIDE.
The costs of .25% do not sound a lot but it would finish a small trader pretty fast.

Matt Z
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  #6 (permalink)
 tpredictor 
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Some of those are good points. However, the trade costs thing is way overblown. Once you add the spread in futures and the broker fees then you will be at similar percentage of costs for your average 1 to 2 day trade (I suspect!!). However, if you use limit on BTC then you are far better off. Your tick is basically .01 cents and your range is say $300 to $500 so you're at 3,000 times your tick which means more profit opportunity. That'd be like if ES were trading 750 points a day! Notional value is misleading. A trader doesn't care about notional value. They just care about how many dollars can they make in relation to costs. Keep in mind there are new products each day offering to trade BTC: so if there are specific concerns it might be possible to address them with a different setup. As for exchanges setting own prices, there would be an arbitrage opportunity if they truly get out of line.

The futures and equities have also experienced "flash crashes". As for accountability, there have been several cases of "close rigging" or other manipulations in future markets. There have also been cases where the exchange was found to be favoring traders with faster feeds. There is no responsibility to market make in the futures either. Because they aren't fixed risk contracts, which I favor, there is still indeed counter party risk too. Also, no mention of PFG or MF Global?

Here is what I think: futures made the most sense when the fixed trade costs were high. You needed a large tick size to overcome those fixed costs. The other reason you needed them was to avoid the PDT rules in equities which were heavily regulated against the small trader.

However, now some stock brokers are offering free trading. There are more options. The big tick size causes more problems for small traders who are cannot properly leverage their trading. Yes, leverage is good but only when one can control it.

I am not stating that BTC is perfect by any means. I have listed above what the ideal market/contract characteristics will have. It is silly when everything is computerized to still have to pay fees for every trade-- though the spread is more important.

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  #7 (permalink)
 mattz   is a Vendor
 
 
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This is not the first thread that you have offered alternatives to the Futures markets and mentioned potentially other markets. I am ok with it, but I suspect it is very discouraging to others who happen to successful at it despite all the challenges or others that are still trying to be. The solution to becoming a better trader is not to jump from one asset to another.

Also, you are a Futures trading vendor; I would like to think that your product could give some advantage to someone(?) if you are promoting it here on the forum.

I happen to disagree with you tremendously what you consider as value to traders. Notional amount and the commissions you pay are critical to large lot traders. This is what leverage provides. They go hand in hand. I have dealt with enough traders to arrive at this conclusion.

As for your other comments:

MF Global and PFG. Not a good chapter in our history. The only comfort I can take is that many people did receive some of their funds back. Since that incident, both regulators and exchange changed procedures. On the other hand, Mt. GOX and DAO sadly customers received zero. Also, these were the exchanges themselves that were hacked supposedly.

Futures did not have a flash crash of 99% of the price. When Flash crashes occur, they are being investigated by industry regulators. Other incidents of spoofing, manipulation, and other activities are not taken lightly. I am yet to see any action that was taken against anyone in the crypto world when it comes to trading irregularities.

When I look at the "best" technology that is offered for coins, it is what we had ten years ago. The Futures trading technology provides better tools, capability, and transparent data that traders could use to make decisions.

Coins are digital assets that also susceptible to hacking. You need to know how to protect them when its your possession.

All assets evolve. BTC will evolve too. I hope they can bring it to the exchanges to be in a regulated environment: https://www.cnbc.com/2017/08/02/cboe-bitcoin-futures-winklevoss-brothers-digital-currency-exchange.html

Again, if you think you are better off in a different market, I suggest that instead of talking theory, please try it.
You have pretty strong opinions, and I would love to hear your experience trading it with real funds. I want to see how cost, slippage and the ability to collect a portion of $300 daily range is working out for you. I have read some forums and threads on Reddit where traders continuously complain about slippage and cost.

It's one thing to be an observer and one thing to be a trader.

Matt Z
Optimus Futures

There is s a substantial risk of loss in futures trading. Past performance is not indicative f future results.

Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. You may lose more than your initial investment. All posts are opinions and do not claim to be facts. Please conduct your own due diligence. Use only Risk capital when trading Futures.
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