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Crypto Trading Tips and Strategies: Understanding the Basics of Basis Trading

December 09, 2018

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As the old saying goes, you need to learn how to walk before you can run.

Before you begin your journey as a cryptocurrency trader or investor, it’s important to have a bit of foundation in trading strategies. Despite the fact that this is a very new market, traditional rules still apply. Central to these rules is the idea of basis trading, which has a wide effect on the crypto market.

If you have ever seen anything about derivatives or futures contracts, then you likely know a bit about basis trading, even subconsciously. In the simplest possible sense, a basis trading strategy is when a trader looks at some sort of asset, like Ethereum or Bitcoin, for example, and believes its market price does not reflect its true value. From here, their next actions resemble those of a hedge fund, in a sense. In doubting the price of the asset, the investor then has to decide if it is too high or too low.

To better understand this, let’s say we have the price of $4500 BTC. As you know, this would be the market price of Bitcoin. Now, from here, you might say that upon looking at the historical price movement of it over a year, it appears to be undervalued. In this particular case, matters can become more confusing due to what futures trading is. In the interest of clarity for now, just imagine that one trader thinks Bitcoin will fall to $3000 in a year, while another may believe it will rise to $10000.

Essentially, in a futures contract, two parties like this with contrasting opinions will be matched up. Once a year has passed, the investor who is closer to the actual market price at that time effectively wins the contract. In the crypto space, all of this would be happening on an online crypto exchange like BitMEX that specializes in derivatives. Therefore, once the winner is determined, both parties pay interest to the exchange that they owe, based on Bitcoin’s price movements related to their bets. The rate of this interest varies and is usually specified by the exchange in its terms and conditions. For most, the popular place to do any of this is BitMEX, which is basically an online platform for trading crypto derivatives.

If you take a look at this blog post from BitMEX, you’ll notice that futures contracts are not the only active use case for a basis trading strategy. Others exist, like swap contracts, which as BitMEX Research states, are basically futures contracts with no defined end. As long as you have the crypto to keep paying the interest on your contract, you can keep trading.

Beyond these examples, more exist, though mentioning them all would be beyond the scope of this piece. Suffice it to say for now that before you invest any money in crypto, you should fully understand the ins and outs of basis trading.

Even if you don’t plan on being a trader, the effect that futures contracts and swap contracts have on crypto prices is considerable. Thus, knowing all of this can mitigate the risk of losing too much of your crypto investments, in any sense.

Kepler Technologies Team

Kepler Technologies is founded with a bold objective: to create customer-centric trading, portfolio management, and business intelligence solutions that mainstream investments into DLT markets and digital assets and drive long-lasting adoption.

There are a few products already released: Lukrum (portfolio management service for blockchain assets) and EOS portfolio (portfolio tracker for EOS tokens holders). Find out more details below.

Emailinfo (at) kepler.finance

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.