Crypto Futures Spread Trading – crypto arbitrage strategy



Cross pair trading is present on any spot exchange

On any cryptocurrency exchange, you will find plenty of cryptocurrencies are traded against major cryptocurrencies like Bitcoin, Ethereum or USDT. This is primarily linked to the way how crypto space developed. To avoid regulations most of the crypto exchanges avoided fiat currencies like USD and EUR. Thus, in order to trade cryptocurrencies, exchanges used major crypto as a quote currency. Thus, pairs like LTC/BTC, XRP/BTC, ETC/ETH were popular. This was essentially a very advanced step in trading which simply confused most beginners.

Without cross pair trading in crypto space would not become very popular as few markets would exist.

At some point, stablecoins emerged which brought more transition way of trading with having pair like BTC/USDT, ETH/USDT

Disadvantage of cross trading

You could sell only what you have. So when a Bitcoin is falling, you should sell it. With a limited number of options, you can sell it against ETH or other cryptos. But if all is falling you should sell it against fiat currency or stablecoin if any. So, back in times without stablecoins, traders either had to accept loss or take crypto out of the exchange and sell it at a broker.

Cross pairs give flexibility

Large numbers of cross pairs that were available at Binance, Bittrex or HitBTC offered a very flexible approach by trading cross pairs to almost anything on the spot market. However, with futures trading, cross pairs are not available as a product. Though crypto could be the first market to show such synthetic products.

If you need to understand what are futures and what are the benefits of trading crypto futures please refer to our in-depth guide on Bitcoin Futures Trading.

Example of futures spread

Typical futures calendar spread example would be trading 2 contracts of futures on oil. For example a futures contract with Apr-21and May-21 expiration dates. Going long (buy) contract with Apr-21 expiration while going short (sell) on May-21 contract will give us a spread. Nearest available futures contract is also known as outright futures contract.

Popular assets of futures spreads are commodity futures and fixed income securities, like bonds. Any futures products are suitable to create a futures spread. Trading strategy using commodities could may also include different classes, like wheat futures, corn futures or soybean futures to create a spread trade.  

Real-life example. A conflict in the Middle East hits the news. This is a potential risk for short term shortages in delivery of crude oil. It will likely affect the outright contract for Oil (closest trading contract). Further expiration contracts will also be affected as we are not sure what will happen, but there is a high probability that the conflict will be solved in a few months' time. Thus, the effect on further expiration contracts will be lower. So the more distant we are from the contract the less volatility will be in that product. We can assume that Apr-21 will be more affected than May-21.

If our stake was at the growth of the Oil, then Apr-21 will be more affected than May-21. Gain on Apr-21 will be larger than the loss on May-21. 

So trading a futures spread will make a synthetic product that has smaller volatility. It should be noted that spread trading is a kind of arbitrage strategies.

Types of futures spreads

There are two types of futures spreads in crypto trading.

First, you can create a spread on different cryptocurrencies, thus having similar products to cross pairs in crypto spot markets. Example: ETH/BTC

Second, you can trade the same product with different maturity. This is similar to the example we've covered above. Example: BTC-0321/BTC-0621.

Benefits of futures spread trading

Low-Risk Strategy

Cryptocurrency markets are extremely volatile and in order to prevent such volatility and limit the risks, the trader will usually put a limit stop-loss position, which will be visible in the order book and will make him the perfect target for the large market player. Applying spread trading to the crypto futures will automatically reduce the overall volatility and at the same time will limit your risks in the event of the unpredictable market crashes.

Clear investment opportunities

In most cases, crypto spreads typically trends more often in relation to the stand-alone futures. These trends are steeper and last longer.

futures spread

Diversification of strategies

Using spread trading in the highly correlated cryptocurrency markets will allow you to diversify your trading strategies. Based on the low risk in comparison to trading on futures along, the trader will have an option of implementing higher leverage or more volume in a single trade

High-risk trading on futures with low leverage can be substituted for the less risky option of spread trading with high leverage.

How to trade futures spread in crypto markets?

To start trading spreads on crypto futures you need a crypto exchange account that allows trading crypto futures and a TradingView account to see the chart. 

In order to understand how spread trading works in practice let's look at the example of ETH-PERP / BTC-PERP on FTX exchange.
First, let's look at a chart. Go to TradingView chart and to get the spread of ETH-PERP / BTC-PERP on FTX exchange type:


You will see a chart showing a spread price.

After you set the Take Profit and Stop Loss prices you are ready to trade.

You can now open FTX exchange and first, open the ETH-PERP in one window and open BTC-PERP in the other window.
Once the price is acceptable to enter a position, make market orders on each asset.
As a result, once you enter you should have 2 positions open. 

To exit the spread close both of your positions simultaneously.

Trading tool for crypto futures spread trading

To decrease risks of spread trading on crypto even further we have created a special trading terminal.

Spread trading terminal allows you to select which assets you would like to use for creating a spread. To change the terminal view from Classic Trading to Spread Trading simply change the strategy type. You can find it right after the exchange selection dropdown.

It is available on all cryptocurrency exchanges that offer futures trading, currently, the list includes FTX, Deribit, Bybit and Binance Futures.

TradingView chart will instantly adapt and show you the synthetic product on the chart. Our Terminal will show what spread you've created in a simple way. 

What's cool, you can then automate the trading and select Take Profit and Stop Loss targets as if you are trading a simple pair on the exchange. Targets will be monitored by Wunderbit and executed once the aim is reached.

Both entries and exits are done with a market order making sure you get the price you expected. On the one hand, limit entries are cheaper and make the spread trading more flexible. On the other hand, risks increase as price volatility on crypto markets is highly significant.

Try futures spread trading on WunderTrading now!