How can I use crypto futures market data for spot trading?

As a crypto spot trader, you may wonder how you can use futures market data as an indicator to inform your trading decisions. Futures markets are a valuable source of information for traders as they may provide a glimpse into the future price movements of underlying assets. Futures contracts allow traders to take a view on the price of an asset at a future date, which can help you gain insights into the potential price trends of that asset. 

In this article, we will explore three  ways in which futures market data may be  used to gain a more complete picture of the market.

What are futures contracts?

Futures are a type of derivative—derivatives are contracts that derive their value from an underlying asset or commodity, thereby allowing you to gain exposure to an underlying asset without purchasing it.

A futures contract is an agreement to buy or sell an asset or commodity at a future date and price. These contracts are traded on a futures exchange, such as Coinbase Derivatives Exchange,  and accessed through a regulated broker.

How can futures market data inform spot trading?

Price Direction

Futures market data can provide insight into the direction of future price movements in the spot market. By analyzing market sentiment and trends in futures prices, spot traders may be able to gain an indication of whether prices are likely to rise or fall in the future. For example, if the price of a Bitcoin futures contract is increasing, this may suggest that there is strong demand for Bitcoin and that prices in the spot market have a potential to rise, as well.

Basis  

Market sentiment is often reflected in a cryptocurrency’s basis, or the difference between its current spot price and its futures price.  If the basis of Bitcoin futures is negative, it could indicate that there is a high demand for the spot asset in the near term or it could indicate a bearish outlook for the future. If the basis of Bitcoin futures is positive, it could indicate that there is a low demand for the spot asset in the near term or it could indicate a bullish outlook for the future.

For example, assume that Bitcoin is trading at $30,000 on the spot market but there is a Nano Bitcoin futures contract expiring next month with a price of $31,000. This results in a positive basis of $1000.

While basis is a useful indicator of market sentiment, it should be evaluated in conjunction with other factors such as trading volume, market depth, and news events.

Volatility

Futures market data can also provide insight into market volatility. Implied volatility is a measure of the market’s expectation for a derivative’s price to fluctuate based on factors such as the current price of the underlying asset and time until contract expiration. By analyzing the implied volatility of futures prices, spot traders may get an indication of how much the market expects prices to fluctuate in the future. High implied volatility may suggest that there is uncertainty in the market and that prices in the spot market may be more volatile as a result.

Keep in mind that...

• Executing successful short-term trading strategies is notoriously difficult and poses risk. History doesn’t repeat itself, so studying market data  patterns won’t necessarily help you make strong predictions, especially in volatile markets. 

• You should invest only what you can afford. A financial advisor can help you develop a strategy and understand the risks associated with investing in cryptocurrencies.

• You should think through which signals matter the most for you and not get overwhelmed by all the information available to you.

Disclosure

Coinbase offers simple and advanced trading. Advanced trading is for experienced traders and is subject to the Trading Rules. Fees on the two platforms vary. Content is for informational purposes and is not investment advice. This is not a recommendation to buy or sell a particular digital asset or to employ a particular investment strategy. Coinbase makes no representation on the accuracy, suitability, or validity of any information provided or for a particular trading strategy.  Investing in crypto comes with risk.