Bitcoin and Futures Trading Basics

While MtGox once again slows down, and the bitcoin changes to a comatose state, the ICBIT Exchange launched a futures trading without a pump.

First, a little theory. Those who are already familiar with it can safely scroll the text to the beginning of the bitcoin-specific part.

Futures (futures contract) (from English futures) is a derivative financial instrument, a standard futures exchange contract for the sale of the underlying asset, at the conclusion of which the parties (the seller and the buyer) agree only on the price level and delivery time. The remaining parameters of the asset (quantity, quality, packaging, labeling, etc.) are specified in advance in the specification of the exchange contract. The parties have obligations to the exchange until the execution of the futures.

Types of futures: Deliverable futures and Settlement (non-deliverable) futures
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We are only interested in the latter. For example, on the RTS-MICEX exchange, currency and commodity futures are settlement only.

The difference between the settlement futures contract from the delivery contract is that the execution of the settlement futures involves settlements between participants only in cash without a physical delivery of the underlying asset.

At the conclusion of the transaction, after the completion of trading, the variation margin is calculated for it separately from the margin for the positions opened in the morning. The margin value for purchase transactions is equal to the difference in quotes and transaction price, multiplied by the number of contracts. Margin value for sales transactions is calculated as the difference between the transaction price and the quotation multiplied by the number of contracts.
Deposit (initial, initial margin) margin or collateral is a refundable insurance premium charged by the exchange when opening a position on a futures contract. As a rule, it is 2-10% of the current market value of the underlying asset.
Deposit margin is charged from both the seller and the buyer.
After the seller and the buyer entered into a futures contract on the exchange, any connection between them is lost, and the clearing house of the exchange begins to act as a party to the transaction. Thus, the initial margin is designed to guarantee the clearing house and its members from the risk associated with one of the clients failing to fulfill their obligations under the contract, that is, to ensure the financial viability of the clearing house of the exchange in a changing market environment.

The futures specification contains the following parameters:

• name of the contract;
• conditional name (abbreviation);
• type of contract (settlement / delivery);
• contract size - the amount of the underlying asset per one contract;
• terms of contract appeal;
• date of delivery;
• minimum price change;
• the cost of the minimum step;
• variation margin .

BTCUSD contract specification available at icbit.se/BUZ2

With regard to Bitcoin, what can be useful for futures trading:
The question “why?” (Or what for is a bitcoin futures market needed):

1. To protect against the risks of Bitcoin fluctuations against the dollar. For example, you have 1000 BTC, and the current exchange rate is $ 6 for 1 BTC. Thus, “for the market” you have bitcoins for $ 6,000. If in the future the rate drops to $ 3 per 1 BTC, then your dollar equivalent savings will be halved, which is not good. When there are futures, the problem is very easy to fix. It is enough to open a short position (“sell”) for 600 BTCUSD futures contracts with the nearest settlement date (600 because the lot of one contract is $ 10) at a price of 6.000. If the exchange rate goes down, then your variation margin will be positive, and add exactly as many bitcoins as you need to buy $ 6,000. And this, by the way, is called - HEDGING .
   And what will happen if the exchange rate rises? The variation margin will be negative, but the value of the bitcoins that you have will also increase, which means you will have exactly the same amount of money you need to buy $ 6000.
2. For currency speculation . Now, if you want to play for the appreciation, you need to have US dollars on your account, buy Bitcoins for them, wait for the rate to rise, and sell. Otherwise, if there is information that the rate will decline, then the only way to get profit from it is to sell the existing bitcoins, and then buy them at a cheaper price.
   Agree, this is not always convenient.
   In the case of the futures exchange, everything is much simpler and much more convenient. All calculations are made in bitcoins, and in order to open a short or long position it is not necessary to convert your money. Sure that the course will grow? Simply open “long” positions on BTCUSD futures, or “short” otherwise. That's not all. On the exchange, you can sell-buy just as much money as you have enough money in your account. Futures are traded marginally, i.e. for opening a position, only a small commission is charged and the guarantee is reserved. Thus, the so-called “shoulder” can reach in some cases up to 1:10. At the moment on ICBIT, the maximum leverage under the BTCUSD contract is approximately 1: 4 .
   Just do not forget that the trade "with shoulders" carries a greater level of risk.
3. For trade in the market of raw materials and metals . Man is not alone among currencies. Sometimes during periods of instability I want to go into something more stable, even if it does not bring huge profits. Historically, this option is precious metals, namely gold. It is not very convenient to buy it in bars for bitcoins (there are problems with the shipment), but to buy futures for gold is very good.
4. The most interesting. Algorithmic trading and automated arbitration. There is always an opportunity to make money here, and this only benefits the market. Classical technical analysis, new approaches of quantitative finance - all this can be used at the expense of low transaction fees and high speed of the stock exchange (for example, it is sometimes impossible to trade on Mt.Gox when the bidding takes several minutes, what algorithmic trading can we talk about? ). Description API is on the site, and the authors of the project promise to soon lay out the sources of a simple bot that could be used for their needs.

You can try to buy / sell one contract if you have about 0.7 BTC on your account, so welcome to the first futures market in the history of bitcoins!

Liquidity is now provided by the founders of the exchange themselves (although nothing prevents you from also trying to be a market maker), and payments from DeepBit are credited to the account almost immediately (in other cases, you will have to wait for the standard 6 confirmations for this case).