Decentral Block Post

Many traders frequently express some relatively large misconceptions about trading cryptocurrency futures, especially on derivatives exchanges outside the realm of traditional finance. The most common mistakes involve futures markets’ price decoupling, fees and the impact of liquidations on the derivatives instrument.

Let’s explore three simple mistakes and misconceptions that traders should avoid when trading crypto futures.

Derivatives contracts differ from spot trading in pricing and trading

Currently, the aggregate futures open interest in the crypto market surpasses $25 billion and retail traders and experienced fund managers use these instruments to leverage their crypto positons.

Futures contracts and other derivatives are often used to reduce risk or increase exposure and are not really meant to be used for degenerate gambling, despite this common interpretation.

Some differences in pricing and trading are usually missed in crypto derivatives contracts. For this reason, traders should at least consider these differences when venturing into futures markets. Even well-versed derivatives investors from traditional assets are prone to making mistakes, so it’s important to understand the existing peculiarities before using leverage.

Many traders frequently express some relatively large misconceptions about trading cryptocurrency futures, especially on derivatives exchanges outside the realm of traditional finance. The most common mistakes involve futures markets’ price decoupling, fees and the impact of liquidations on the derivatives instrument.

Let’s explore three simple mistakes and misconceptions that traders should avoid when trading crypto futures.

Derivatives contracts differ from spot trading in pricing and trading

Currently, the aggregate futures open interest in the crypto market surpasses $25 billion and retail traders and experienced fund managers use these instruments to leverage their crypto positons.

Futures contracts and other derivatives are often used to reduce risk or increase exposure and are not really meant to be used for degenerate gambling, despite this common interpretation.

Some differences in pricing and trading are usually missed in crypto derivatives contracts. For this reason, traders should at least consider these differences when venturing into futures markets. Even well-versed derivatives investors from traditional assets are prone to making mistakes, so it’s important to understand the existing peculiarities before using leverage.

Bitcoin (BTC) sought to overturn August resistance on Sep. 10 as whale buy-levels dictated BTC price action.

Whales provide short-term price ceiling

Data from Cointelegraph Markets Pro and TradingView showed BTC/USD hitting new multi-week highs of $21,671 on Bitstamp.

The pair capitalized on a short squeeze which began early on Sep. 9, taking it around 10% higher after plumbing the lowest levels since the end of June.

Analyzing the events, on-chain monitoring resource Whalemap noted that clusters of buy-ins by whales had effectively allowed Bitcoin to put in a floor.

$19,000 had been a high-volume zone of interest for buyers previously, and this thus remained unviolated during the visit to two-month lows.

Bitcoin (BTC) sought to overturn August resistance on Sep. 10 as whale buy-levels dictated BTC price action.

Whales provide short-term price ceiling

Data from Cointelegraph Markets Pro and TradingView showed BTC/USD hitting new multi-week highs of $21,671 on Bitstamp.

The pair capitalized on a short squeeze which began early on Sep. 9, taking it around 10% higher after plumbing the lowest levels since the end of June.

Analyzing the events, on-chain monitoring resource Whalemap noted that clusters of buy-ins by whales had effectively allowed Bitcoin to put in a floor.

$19,000 had been a high-volume zone of interest for buyers previously, and this thus remained unviolated during the visit to two-month lows.

Bitcoin (BTC) has been in a rut, and BTC’s price is likely to stay in its current downtrend. But like I mentioned last week, when nobody is talking about Bitcoin, that’s usually the best time to be buying Bitcoin. 

In the last week, the price took another tumble, dropping below $19,000 on Sept. 6 and currently, BTC bulls are struggling to flip $19,000–$20,000 back to support. Just this week, Federal Reserve Chairman Jerome Powell reiterated the Fed’s dedication to doing literally whatever it takes to combat inflation “until the job is done,” and market analysts have increased their interest rate hike predictions from 0.50 basis points to 0.75.

Basically, interest rate hikes and quantitative tightening are meant to crush consumer demand, which in turn, eventually leads to a decrease in the cost of goods and services, but we’re not there yet. Additional rate hikes plus QT are likely to push equities markets lower and given their high correlation to Bitcoin price, a further downside for BTC is the most likely outcome.

So, yeah, there’s not a strong investment thesis for Bitcoin right now from the perspective of price action and short-term gains. But what about those who have a longer investment horizon?

Let’s quickly review 3 charts that suggest investors should be buying Bitcoin.

The correlation between Bitcoin (BTC) and stock markets has been unusually high since mid-March, meaning the two asset classes have presented near-identical directional movement. This data might explain why the 10% rally above $21,000 is being dismissed by most traders, especially considering S&P 500 futures gained 4% in two days. However, Bitcoin trading activity and the derivatives market strongly support the recent gains.

Curiously, the current Bitcoin rally happened a day after the White House Office of Science and Technology Policy released a report investigating the energy usage associated with digital assets. The study recommended enforcing energy reliability and efficiency standards. It also suggested federal agencies provide technical assistance and initiate a collaborative process with the industry.

Notice how the peaks and valleys on both charts tend to coincide, but the correlation changes as investors’ perceptions and risk assessments vary over time. For example, between May 2021 and July 2021, the correlation was inverted most of the period. Overall, the stock market posted steady gains while the crypto markets collapsed.

More importantly, the chart above shows a huge gap being opened between Bitcoin and the stock market as stocks rallied from mid-July to mid-August. A comparison using the same scale would be better, but that does not work due to the difference in volatility. Still, it is reasonable to conclude that historically these gaps tend to close.

The S&P 500 futures declined 18% in 2022 until Sept. 6, while Bitcoin dropped 60.5% during the same period. So it makes sense to assume that if investors’ appetite for risk assets returns, assets with higher volatility will outperform during a rally.

Federal Reserve Chairman Jerome Powell said in a question and answer session hosted by the Cato Institute on Sept. 8 that the central bank will continue to hike rates until inflation is under control. However, these comments did not rattle the markets as much as most would have anticipated, indicating that traders might have already factored in a 75 basis point rate hike in the Fed’s next meeting on Sept. 20–21.

Bitcoin has been strongly correlated with the S&P 500 and inversely correlated with the United States dollar index (DXY) for the past several weeks. With the DXY cooling off after hitting a two-decade high, risky assets have been attempting a recovery.

U.S. equities markets are attempting to snap a three-week losing streak while Bitcoin (BTC) has soared above the psychological level at $21,000.

Does the rally in the equities and crypto markets indicate that the risk-on sentiment is back? Let’s analyze five asset classes to review their trends and determine where they might go in the next few days.

BTC/USDT

Bitcoin rebounded off the strong support at $18,626 on Sept. 7 and broke back above the breakdown level of $19,520 on Sept. 9. This may have triggered short-covering by the aggressive bears, which propelled the price above the 20-day exponential moving average (EMA) ($20,434).