I want to preface this article by stating that I am not a full-time cryptocurrency trader, nor am I even a remotely experienced cryptocurrency trader. There are undoubtedly many traders out there who have much more experience in the crypto world than myself. In fact, yesterday was my first time trading cryptocurrency, and there was unequivocally a large degree of luck involved in this bitcoin futures trading story.
Nonetheless, I’ve been trading stocks, options, and futures for a little over five years, so the learning curve for bitcoin futures was much shorter for myself than it might be for other traders.
This article describes how I turned $300 into $2,321.99 solely by trading bitcoin futures in one day. My hope is that this will be a helpful, educational resource as well as proof that it is indeed possible to turn a small amount of money into a large amount of money in a short time period.
This story starts with how I actually obtained $300 in bitcoin. I didn’t have to trade any US dollars for it. Technically, you could say my return on this particular trade is really 2,300%, because I ultimately started from $0.00.
In addition to trading and investing, I’m a freelance financial writer for a variety of clients around the world. It keeps me busy and is a fun way to stay plugged into the markets. On Tuesday, one of my clients needed a standard news letter written, and he attempted to release my payment in escrow via a common online freelancing platform.
Ironically, his credit card got denied by the issuing bank! Enter the convenience of bitcoin!
It literally would have taken more time for the client to call the credit card company, go through an infuriating series of automated questions for five minutes, wait on hold, and then finally speak with an actual human than it would have taken to send $300 in bitcoin to my digital wallet.
The client and I agreed that bitcoin was the way to go in this situation. The $300 in bitcoin (0.0033667 at the time) was immediately deposited into my Deribit account. For those that don’t know, Deribit is one of the only liquid bitcoin futures and options exchanges, but it also obviously functions as a digital wallet to store bitcoins.
Before we talk about the actual structure of my bitcoin futures trade, there are some important things to note about bitcoin futures in general. Although brokers like TD Ameritrade offer bitcoin futures trading to clients, these are not the same bitcoin futures that exchanges like Deribit and BitMEX offer.
Bitcoin futures that trade on the CME and Cboe (Chicago Mercantile Exchange and Cboe Global Markets, respectively) are regulated by the US government. There are two symbols for regulated US bitcoin futures, XBT and BTC, you can read about the differences between the two sets of futures here.
To trade these futures, you need to have a futures trading account, typically with a minimum of at least $2,500 just to open. Only a handful of US brokers offer bitcoin futures to their clients, and not every broker is equal when it comes to bitcoin futures. For example, with TD Ameritrade, you must maintain $25,000 in your account to be eligible for bitcoin futures; this is TD’s own rule, not the US government’s. Given that the margin requirements for CME (Chicago Mercantile Exchange) bitcoin futures are only around $7,000 to $9,000, having $25,000 is excessive and not a good use of capital.
For those who want to trade regulated bitcoin futures, tastyworks is currently the only US broker that does not impose special margin requirements for bitcoin futures. Check out a full review of tastyworks here.
There are significant differences between Deribit’s bitcoin futures and CME/Cboe bitcoin futures. When people say “bitcoin futures” it’s tough to know if they’re talking about regulated US bitcoin futures contracts or actual unregulated cryptocurrency bitcoin futures.
Regulated Bitcoin Futures
- Denominated in US dollars
- Strict margin requirements set by exchanges
- Closed on all day on Saturdays and most of Sunday
- Brokers and exchanges charge fees per contract
- Minimum 1 contract required, so must have minimum margin for 1 contract
Unregulated Bitcoin Futures
- Denominated in bitcoin
- Can have anywhere from 50x to 100x leverage
- Trades 24/7 without stopping
- Not regulated by any government
- Obviously not reported to IRS or SEC
- Much lower margin requirements
- Eligible for fee rebates for orders that provide liquidity
Cboe XBT and CME BTC futures are both regulated US futures products, but they trade on two separate futures exchanges in Chicago. Since these futures products are regulated in the US markets, they are subject to taxation, minimum margin requirements, and are not anonymous at all.
With unregulated bitcoin futures, like the futures Deribit offers, there is 50-to-1 leverage. That is absolutely massive. Compared with XBT futures, where 1 XBT contract = 1 bitcoin futures, the only leverage is the amount of margin required to hold 1 XBT contract, which is typically around 70% of the price of bitcoin. The minimum quantity of regulated bitcoin futures you can buy is 1 contract.
Even though they seem different, if you buy a regulated bitcoin futures contract and buy the equivalent amount of unregulated bitcoin futures contracts, your profit/loss scenario will be identical. Both futures products are derivatives of the same asset, bitcoin. It’s just important to understand the specifics of which futures your trading.
If I wanted to trade the equivalent of 1 bitcoin via regulated bitcoin futures, I would have needed at least $7,000 as an initial margin requirement. To profit $2,000, bitcoin would have had to go up $2,000 in one day, which is possible, but this did not occur on the day I traded.
Since I elected to trade unregulated bitcoin futures, and take advantage of the 50-to-1 leverage, I was able to buy the equivalent of 1.5 bitcoins, a position that had a notional value of roughly $14,250 at the time. It only took $300 to control $14,250 of capital. This is the power of leverage.
Even better, since Deribit liquidates positions in accounts if your maintenance margin requirement falls below the necessary level, there was no risk of loss beyond my initial deposit. This is technically not the case with regulated US futures, since brokers have your information and could hunt you down and seek payment if your futures account blows up.
As any trader knows, leverage is a double-edged sword. If you’re wrong on, losses will be disastrous. If you’re right, however, profits will be enormous.
Simply put, enormous amounts of leverage enabled me to turn $300 into $2,300 in only one day. Without any leverage, a return of 677% in a day would be impossible. Starting with only $300 in buying power, bitcoin would have had to more than quintuple in price overnight, and I still wouldn’t have made more than $1,800.
With Deribit’s bitcoin futures, there are no commissions or fees for limit orders, since limit orders are seen is giving liquidity to the market. In fact, there is actually a 0.02% rebate for all limit orders. Orders that take liquidity, which are market orders and forced-liquidation orders, cost 0.05% of every trade. If you only lose limit orders, you’ll be paid a commission on every trade.
When compared to the $1.25 commission, plus the CME exchange fee of $0.50, for each regulated bitcoin futures contract with tastyworks, Deribit is more economical for trading bitcoin futures. Deribit actually paid me to place my opening and closing trades, imagine that.
Moreover, another thing that’s unique about Deribit’s bitcoin futures is how the initial and maintenance margin works on a real-time basis. This also enabled me to make an outsized return in a short period of time. Traditional futures, like the popular E-Mini S&P 500 futures, are marked-to-market every trading day at at 13:15 CT.
Whatever profits/losses accrued during the day (and the margin impact it will ultimately have) from holding positions in these futures contracts is always reflected in a trader’s net trading account balance after 13:15 CT.
However, Deribit has done something really interesting with their bitcoin futures. The margin requirement to hold Deribit bitcoin futures is adjusted immediately to reflect profit and loss. For example, say you buy 1,000 bitcoin futures contracts on Deribit’s platform (with bitcoin at $10,000, 1,000 contracts is equivalent to 1 bitcoin). There are two factors to look at here: initial margin requirement and maintenance margin requirement.
As the price of bitcoin goes up, both your initial and maintenance margin requirements will decrease on Deribit’s platform. Less bitcoin is required to hold the position, and you can use any accrued profits to actually buy more bitcoin, even before the contract settles. What does this mean?
It means, if you’re long, you can buy more bitcoin futures and add to your position as bitcoin rallies, or if you’re short, you can sell more bitcoin futures and add to your position as bitcoin plummets.
Futures offer leverage. Leverage is inherently risky. We all know this. But in this instance, since the 0.0033667 bitcoin was traded for a few hours of my time, I was willing to take a chance and risk it all.
I didn’t trade any of my dollars for the bitcoin I received, so psychology risking all 7 numbers behind the decimal didn’t seem that significant to me.
Obviously I didn’t want to lose the bitcoin I received, but it was definitely more stress-free thinking of numbers instead of dollars.
One of my favorite mystery traders, CIS, who made over $34 million during the August 24th, 2015 market meltdown once offered incredibly profound advice during a rare Bloomberg interview:
“Buy stocks that are being bought, and sell stocks that are being sold.”
CIS is a veteran futures trader who has allegedly put on futures positions so large that his P/L moved up or down by $25,000 for every minimum futures tick. For reference, my bitcoin futures position fluctuated by $8.00 for every tick.
His advice seems simplistic, but there is a lot of merit to his statement. After all, trend-following algorithmic Commodities Trading Advisors do exactly what CIS describes, as do countless other quant firms.
I never go into a trade without a plan, and having a plan to buy because other people buy seemed solid enough to me. Over the years, I’ve determined it’s damn near impossible to catch a falling knife without cutting myself. That is, buying a falling asset in an attempt to accurately pick the bottom.
CIS’s advice fits the classic “castle in the sky” trading idea, where it’s perfectly okay to buy an asset on the way up (even if it’s horrendously overvalued by every metric), as long as you can unload it on someone else before it goes down.
So this was my strategy. In general, I’m bullish on bitcoin and blockchain technology as a whole, and this bullish thesis was the undertone of my investment strategy to buy when other people are buying.
I knew I wanted to be long, so I just had to wait for a time when bitcoin started to go up, and I would buy… and buy big.
These are the screenshots that show my actual trades. I placed a limit order to buy the equivalent of roughly 8 bitcoins around $9,540. Since I added liquidity, I actually received a 0.02% rebate for the entire order value. Pretty sweet.
I bought so many contracts at one time that the order was filled in different pieces over the span of a few minutes.
Soon after I bought the futures contracts, bitcoin went down, and I had the opportunity to buy a little bit more at $9,525 with the remaining margin I had, so I did.
I could add a lot of fluff here and overdramatize what happened, but in reality, after the quick dip to $9,525, bitcoin started skyrocketing again. Keep in mind, by strategy of buying when other people are buying was still in place, because people were evidently buying bitcoin all day, since bitcoin was up 3% for the day.
As bitcoin started rising, I kept buying more futures contracts until I maxed out my initial margin buying power.
It worked. I established a net long position of nearly 8 bitcoins, which meant that for every $100 increase in bitcoin, I would profit $800. Bitcoin rallied a few hundred dollars and that was that. I sold my position, looked at my account equity, used Google’s BTC/USD converter to verify, and sure enough I turned $300 into $2,300 in only a few hours.
As you can see here, I sold the futures contracts for $9747.00 each. This screenshot doesn’t show all of the order fills, because it is several pages. Again, since I used a limit order, I was paid a rebate of 0.02% of the entire order value.
This chart shows bitcoin’s price movement throughout the duration of my futures trading. I was feeling quite comfortable with my profits, which actually got as high as $3,800 at the peak, and I turned into a greedy bastard and thought bitcoin was going to go to $10,000 immediately. I kept imagining how much money I would make if bitcoin went to $10,000.
Guess what? Bitcoin didn’t go to $10,000. It sold off more than $100 in 2 minutes and I lost $1,500.
Greed and naivete took over and I pretended like my profits would never end. Deep down, I knew I was fooling myself but I just couldn’t manage to actually close out the trade.
In literally the blink of an eye, bitcoin went from $9,750 to $9,5750 and my heart skipped a beat. As a general rule, I always try to wait at least a few moments after dramatic price movements like this (even though it can be excruciating), as dramatic movements are often exacerbated due to triggered stop-loss orders and panicked traders (like myself, who dump their positions).
I waited another hour and prices rebounded somewhat, so I sold my entire position. This sharp sell-off was a crude reminder that I became overly complacent and wasn’t ready to take my profits like my damn life depended on it. Luckily, I still got out with a decent profit, though I definitely left money on the table.
This is my account transaction history. The final settlement value shows a gain of $1,700.
If you want to try trading bitcoin futures, you have to decide if you want to trade regulated or unregulated futures. Deribit is the best choice for unregulated bitcoin futures and tastyworks is the best choice for regulated bitcoin futures.
We like trading bitcoin futures both ways, but keep in mind that “unregulated” in the case of cryptocurrency is somewhat risky. Technically speaking, all bitcoin trading is unregulated, but that is also what makes it great.
Deribit doesn’t charge fees for limit orders and has an easy-t0-use trading platform for futures. Although Deribit says US clients aren’t allowed, there’s no identity verification required, so I said I was from Canada and got around the country requirement process.
tastyworks is a relatively new online brokerage that’s geared strictly for active options and futures traders. For bitcoin futures, they have the lowest pricing, lowest margin requirements, and a sweet downloadable trading platform.
In less than one day, I generated $2,300 out of thin air. I started with $0.00 and made $2,300. Granted, to get the $300 in bitcoin I had to trade a few hours of my time to write a news letter, but I enjoy writing. To all of the naysayers out there that say it’s not possible turn a small amount of money into a large amount, this is proof that it is in fact possible.
Will everybody be able to start trading bitcoin futures and profit like this? Of course not. That’s unrealistic. For a some, however, who understand what they’re doing and how futures products work, there is definitely a profit opportunity.