Basic Spreading Between Spot and Futures
Basic Spreading Between Spot and Futures
Welcome to the world of cryptocurrency trading. As a beginner, you likely started by buying digital assets like Bitcoin or Ethereum on the Spot market. This means you own the actual asset. However, another powerful tool available is trading futures contracts. Understanding the relationship, or "spread," between the **spot market** price and the futures price is crucial for advanced risk management and profit-taking strategies. This guide explains the basics of using futures to complement your spot holdings.
What is the Spot-Futures Spread?
The relationship between the price of an asset right now (spot price) and the price agreed upon for delivery in the future (futures price) is called the spread.
When the futures price is higher than the spot price, the market is in **contango**. This is common, as holding an asset incurs costs (like storage or opportunity cost), or simply reflects general market optimism.
When the futures price is lower than the spot price, the market is in **backwardation**. This often signals short-term supply tightness or immediate bearish sentiment.
For most beginners looking to manage existing spot bags, we focus on using futures to hedge or partially lock in gains, often when the market is in contango. This strategy is a core part of Simple Hedging Using Crypto Futures.
Practical Actions: Balancing Spot with Simple Futures
The main goal of spreading is not necessarily to speculate on the futures market itself but to use futures as a tool to manage your existing **spot holdings**. This is key to Spot Versus Futures Risk Allocation.
Partial Hedging to Protect Gains
Imagine you hold 1 full Bitcoin (BTC) that you bought cheaply, and the price has risen significantly. You are happy with your long-term holding but worried about a potential short-term correction. You want to protect some of your recent gains without selling your actual BTC.
You can use a short futures position to hedge this risk. If you sell a BTC futures contract equivalent to half of your spot holding, you are effectively betting that the price will drop by that amount.
If the price drops: 1. Your spot holding loses value. 2. Your short futures position gains value, offsetting the spot loss.
If the price rises: 1. Your spot holding gains value. 2. Your short futures position loses value, offsetting some of the spot gain.
This technique allows you to maintain ownership of the underlying asset while reducing volatility exposure. For more complex scenarios involving multiple contracts, review Managing Multiple Open Futures Contracts.
Example of Partial Hedging:
Suppose BTC Spot Price is $60,000. You hold 1 BTC. You decide to hedge 0.5 BTC using a futures contract.
| Scenario | Spot Portfolio Change | Futures Position Change | Net Effect (Simplified) |
|---|---|---|---|
| Price Drops to $58,000 (Loss of $2,000 on 1 BTC) | -$2,000 | +$1,000 (Gain on 0.5 BTC short) | -$1,000 Net Loss (Hedging worked partially) |
| Price Rises to $62,000 (Gain of $2,000 on 1 BTC) | +$2,000 | -$1,000 (Loss on 0.5 BTC short) | +$1,000 Net Gain (Still profiting, but less than unhedged) |
This demonstrates how futures can be used for Protecting Spot Gains with Short Futures. Before entering any trade, ensure you have a clear strategy, perhaps following guidelines in Building a Solid Futures Trading Plan from Scratch.
Using Technical Indicators to Time Entries and Exits
When deciding *when* to initiate a hedge (a short futures trade) or *when* to close it (to let your spot position fully participate in a rally), technical analysis is essential. Beginners often rely on momentum indicators.
Relative Strength Index (RSI)
The RSI measures the speed and change of price movements. It oscillates between 0 and 100.
- Readings above 70 often suggest an asset is overbought, potentially signaling a good time to initiate a short hedge against your spot holdings. Review Using RSI for Exit Signals for more detail on using this for selling signals.
- Readings below 30 suggest oversold conditions.
Moving Average Convergence Divergence (MACD)
The MACD indicator helps identify changes in momentum and trend direction.
- A bearish crossover (the MACD line crossing below the signal line) can suggest downward momentum, confirming a good time to use Using Futures to Short a Position to hedge. For beginners, studying the Simple MACD Crossover Strategy can be very helpful.
Bollinger Bands
Bollinger Bands consist of a middle band (usually a 20-period simple moving average) and two outer bands showing volatility.
- When the price touches or exceeds the upper band, it suggests the price is high relative to recent volatility, potentially indicating a short-term peak where a hedge might be timely. Understanding volatility is key when Analyzing Trading Volume Indicators.
Timing Hedging Exits
If you hedged because you feared a drop, you need to know when to remove the hedge. If the market bottoms out and starts strongly reversing upward, keeping the short futures position open will start eating into your spot profits. You should exit the hedge when momentum shifts back up, perhaps looking for a bullish MACD crossover or an RSI moving strongly away from the oversold territory (e.g., crossing above 40).
Risk Management Notes for Spreading
Spreading involves managing two positions simultaneously, which increases complexity and potential for error.
Leverage and Margin
Futures trading inherently involves Understanding Leverage in Crypto Futures. Even when hedging, you must understand your Beginner Guide to Margin Requirements. If your short hedge position is liquidated because the price moves sharply against it (e.g., you hedged a drop, but the price unexpectedly skyrockets), you could lose your margin deposit for that futures trade.
Funding Rate Impact
If you are using perpetual futures contracts (the most common type), you must account for the Funding Rate in Perpetual Futures.
- If you are holding a long spot position and hedge with a short perpetual future, and the funding rate is heavily positive (meaning longs pay shorts), you will *receive* funding payments. This can slightly boost your hedge effectiveness.
- Conversely, if the funding rate is negative, you will have to pay funding on your short hedge, which eats into your hedge protection. Be aware of the Impact of Funding Rate on Long Positions.
Psychology Pitfalls
Trading between spot and futures introduces specific psychological challenges, covered generally in Psychology Pitfalls in Crypto Trading.
1. Over-hedging: Fear causes traders to hedge too much (e.g., shorting 150% of their spot holding), which limits upside potential too severely. Stick to your plan, perhaps aiming for 50% or 75% hedging initially. 2. Ignoring the Hedge: Once the hedge is placed, traders sometimes forget about it, only focusing on the spot price. If the hedge hits its target exit signal, you must act, or it becomes a speculative position itself. Reviewing Scalping in Crypto Futures Markets might give insight into quick decision-making, though hedging is usually a medium-term strategy. 3. Complexity Overload: Trying to manage spot, long futures, and short futures all at once can lead to confusion. Start simple, perhaps only using Limit Orders Versus Market Orders to manage your hedge entry/exit points precisely.
When When to Rebalance Spot Portfolio, you must remember to close the corresponding futures hedge first, or you risk creating an unintended large speculative position. For example, if you decide to sell 25% of your spot BTC, you must first close 25% of your short hedge position.
To see an example of platform features that aid in managing these complex positions, you might look at the MEXC Futures Overview. Always ensure you are trading on a reliable platform, perhaps starting by researching Choosing Your First Crypto Exchange.
See also (on this site)
- Spot Versus Futures Risk Allocation
- Balancing Spot Holdings with Futures Positions
- Simple Hedging Using Crypto Futures
- Protecting Spot Gains with Short Futures
- Understanding Leverage in Crypto Futures
- Beginner Guide to Margin Requirements
- Choosing Your First Crypto Exchange
- Essential Platform Features for New Traders
- Setting Up Two Factor Authentication Crypto
- Spot Trading Versus Futures Trading Basics
- When to Use Spot and When to Use Futures
- Initial Risk Budgeting for New Traders
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Recommended Futures Trading Platforms
| Platform | Futures perks & welcome offers | Register / Offer |
|---|---|---|
| Binance Futures | Up to 125× leverage, USDⓈ-M contracts; new users can receive up to 100 USD in welcome vouchers, plus lifetime 20% fee discount on spot and 10% off futures fees for the first 30 days | Sign up on Binance |
| Bybit Futures | Inverse & USDT perpetuals; welcome bundle up to 5,100 USD in rewards, including instant coupons and tiered bonuses up to 30,000 USD after completing tasks | Start on Bybit |
| BingX Futures | Copy trading & social features; new users can get up to 7,700 USD in rewards plus 50% trading fee discount | Join BingX |
| WEEX Futures | Welcome package up to 30,000 USDT; deposit bonus from 50–500 USD; futures bonus usable for trading and paying fees | Register at WEEX |
| MEXC Futures | Futures bonus usable as margin or to pay fees; campaigns include deposit bonuses (e.g., deposit 100 USDT → get 10 USD) | Join MEXC |
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