Spread is a common trading indicator, which refers to the price difference between different types of positions.
Spread trading is a trading strategy of opening two positions at the same time: a "long" position and a "short" position.
The price difference is the price difference between these two positions, which exists in many situations, such as different dates and different interest rates.
In fact, traders are trading the relationship between two assets, not the assets themselves.
This paper mainly talks about futures spread and cross-currency spread trading. In cryptocurrency field, the latter is often called cross-currency exchange rate trading.
- What is spread trading
Spread trading is a trading strategy of opening two positions at the same time: a "long" position and a "short" position. In fact, traders are trading the relationship between two assets, not the assets themselves.
In most exchanges, cryptocurrency products are traded with BTC,ETH or USDT as basic assets. This is mainly due to the development of cryptocurrency world, because the use of legal tender (such as USD and Euro) requires the exchange to follow stricter regulations, which will also limit the normal use of many users. Therefore, most exchanges use cryptocurrency as the basic asset.
Therefore, currency pairs such as LTC/BTC, XRP/BTC and etc/eth have become very popular in this field. Trading cross currency pairs is also an example of spread trading. In essence, this is a very avant-garde trading technique, which will confuse most new traders.
For example, LTC/BTC is trading the price difference between LTC and BTC, which is often called cross-currency exchange rate trading.
It is no exaggeration to say that if there is no cross currency pair transaction, cryptocurrency will not have such a wide market, and even cryptocurrency will not be as popular as it is now.
- Advantages and disadvantages of cross-currency exchange rate transactions
The main advantage of cross-currency exchange rate trading is that you can buy and hold strong cryptocurrencies in a simplified way, and sell weak cryptocurrencies at the same time, thus making profits from the price difference between them.
The main disadvantage of cross-currency exchange rate trading is that due to poor spot liquidity, the cost of currency pairs that are not very popular for trading may be higher. However, this problem can be solved by trading futures.
In spot trading, you can only sell the assets you own. Therefore, when the price of BTC drops, you should sell it. In the spread trading idea, you can replace BTC with ETH or other cryptocurrencies. However, because the encrypted assets are highly correlated, the whole market will be negatively affected, so it would be a better choice for you to replace BTC with legal tender or stable currency.
In recent years, cryptocurrency derivatives market has developed rapidly, and its trading volume is much larger than that of the spot market, which makes it more liquid and has lower trading friction. This is why derivatives market attracts more traders and increases asset volatility, which makes it an ideal market for applying spread trading strategy.
- Futures spread type
There are two types of futures spreads in cryptocurrency transactions.
First, you can trade futures with the same assets but different maturities. This strategy is also called futures calendar spread. For example, the price of BTC futures in March is lower than that in June. If you think that the price of BTC will continue to rise in the first quarter of 2021, but it will not perform well in the second quarter of 2021, you can buy BTC futures in March and sell BTC futures in June. If the price gap narrows, you will make a profit.
Secondly, you can establish price difference on different cryptocurrencies or their futures, so that you can realize cross-currency price difference trading in the cryptocurrency spot market. Example: ETH/BTC.
- Advantages of futures spreads
- low risk strategy
The cryptocurrency market is very unstable. Therefore, it is very important to manage risks correctly. Through the trading spread, most of the traders' exposure will be eliminated by hedging, so the market direction is less important, as long as the performance of long positions is better than that of short positions.
In addition, under this mode, traders can greatly benefit from the more turbulent market. Because of the high correlation between cryptocurrencies, it is obviously easier to predict the convergence of price difference than to predict that an asset will continue to break through a new high. When the market fluctuates violently, the trading spread can be dispersed and converged many times, thus creating numerous profit possibilities with limited risks.
- Clear investment opportunities
In most cases, compared with only trading futures, the price difference trend of cryptocurrencies is more obvious. These trends are steeper and last longer.
- Diversification of strategies
Trading spreads in highly correlated cryptocurrency markets can also diversify your trading strategies. Compared with only futures trading, traders can choose to achieve higher leverage or larger trading volume.
The risk of spread trading under high leverage is even smaller than that of directional trading under low leverage.
How to trade futures price difference in cryptocurrency market.
To start trading the price difference of cryptocurrency futures, you need a trading account for trading cryptocurrency futures and a quotation software to view the price difference.
To understand how spread trading works in practice, let's take a look at the example of ETH-PERP/BTC-PERP on Deribit.
At first, let's enter the TradingView chart and get the price difference of ETH-PERP/BTC-PERP on Deribit exchange type:
Deribit：ETHPERP / Deribit：BTCPERP
You will see a chart showing the spread price.
After setting the take profit and stop loss prices, you can trade.
Now, you can open Deribit. First, open ETH-PERP in one window and BTC-PERP in another window.
After that, buy a contract at the price you think is appropriate, and sell a contract at the same time. The ratio of the two prices can be 1:1 of the legal currency standard, or it can be your own choice.
After placing the order, you should have two hedging positions now.
After the market changes, if you want to end this spread transaction, you can close two positions at the same time.
- Summary
As a matter of fact, spread trading is a very popular trading method, which we often call arbitrage. However, there are many kinds of spread trades, of which arbitrage is only a part. Some spread trades change the trading target through combination, such as the exchange rate of different currencies.
The low risk of this kind of transaction is sought after by many mature investors. You can try to combine positions and build a spread transaction yourself.