How to Trade Bitcoin Derivatives

New to the cryptocurrency derivatives game? Not sure about your short from long, your maker from your taker fees, or your Market Orders from your Limit Orders? Don’t fret! It’s all explained here in the guide on how to trade Bitcoin derivatives on Bybit.

Bitcoin derivatives: the basics

Firstly, let’s cover the basics and explain what we mean by Bitcoin and derivatives. Bitcoin (BTC) is one of four cryptocurrencies that you can trade on Bybit, with the others being ETH, EOS and XRP. Although we’ll focus on Bitcoin and how to trade that on Bybit in this article, the same logic applies to the other tradable cryptocurrencies as well.

Bitcoin takes up the lion share of trading volume and general awareness when it comes to cryptocurrencies. Some estimates have put the market capitalization of Bitcoin among cryptocurrencies to be as high as 90%.

Its price is notoriously volatile, which for many speculative traders, is a major factor in its appeal. After reaching a peak in price of nearly $20,000 in late 2017, its price plummeted in early 2018 and it remained bearish throughout the year. However, this year its price has been somewhat bullish, being around $7,200 at the time of writing (11/26/2019), an increase of around 200% from what it was at the dawn of the year.

A derivative, as its name suggests, is something that derives its value from an asset, and in Bybit’s case, this is cryptocurrency. Also in Bybit’s case, the agreement to buy or sell the cryptocurrency asset comes in the form of a perpetual contract.

A perpetual contract is an innovative product used in cryptocurrency trading that is an agreement to buy or sell an asset in an unspecified point in the future – there is no expiry date. It is essentially in between spots margin trading (that settles immediately) and futures (that settles at a specified point in the future)

Now, we’ve covered what Bitcoin derivatives mean, let’s take a look at how you can trade them on Bybit.

Setting up a Bybit account

Before you start trading on Bitcoin on Bybit, you’ll need to set up a Bybit account.

With no KYC, it’s a quick and easy process. You just need to give your email address or mobile number. If you don’t already have an account, you can click here to get started.

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Check out rewards hub for registration rewards and more!

Making a deposit

Please be aware that you can not buy Bitcoin on Bybit, neither can you deposit any other form of currency such as fiat or other cryptocurrencies to trade Bitcoin with on the platform, so you’ll need to have an existing Bitcoin wallet from which you can deposit Bitcoin into your wallet on Bybit.

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Start trading

Now, you’re all set!

As you’ll be able to see, it is possible to buy (long) or sell (short) your position. There are a variety of options available in terms of types of orders (Market, Limit and Conditional), and leverage, order price and quantity. Also, there are three time in force methods to execute your order: ‘GoodTillCancelled’, ‘ImmediateOrCancel’ and ‘FillorKill’. These are used when executing limit orders.

Let’s go into more detail about these terms:

• You will click on ‘Buy/long’ or ‘Sell/short’ at the final stage of order execution, after you have configured all your order settings.

Market Orders are instantly executed and filled from the order book at the best available price.

• There are two types of Market Orders: buy Market Orders and sell Market Orders. Execution is guaranteed, but as markets can fluctuate, the execution price is not. Taker fees of 0.075% are applied to Market Orders because traders are taking away liquidity from the order book.

Limit Orders are not instantly executed, but you can guarantee the price that they will be executed, providing the price is hit.

• This is done by pre-setting the price the order will be executed. Buy Limit Orders must be set at a lower price than the last traded price, or they will be filled as a Market Order immediately. On the flip side, Sell Limit Orders must be set at a higher price than the last traded price for the same reason. How much of a Limit Order gets filled may depend on what time on force methods are used, of which there are three. Traders receive maker fees of 0.025% when they conduct Limit Orders because they provide liquidity to the order book.

GoodTillCancelled (GTC) orders remain active until they are fully executed, or canceled by the trader.

ImmediateOrCancel (IOC) orders must be filled at the limit price or better immediately. If the orders cannot be filled immediately, they will be canceled. It is possible to have a partial fill for IOC orders. If there is a partial fill, the unfilled part of the order will be canceled.

FillOrKill (FOK) orders must be filled at the limit price or better immediately. If this doesn’t happen, they will be canceled. Unlike IOC, partial fills are not allowed.

Let’s take a look from an example at how to use a Limit Order.

A trader wants to buy 10,000 BTC USD perpetual contracts immediately with a maximum execution price of no more than 7,001 USD.

Order BookMarket DepthDepth 0.5
PriceQuantityTotal
7003300013000
7002500010000
700150005000
Last Traded Place: 7000Market Price: 7050 
700040004000
699950009000
6998800017000
Time
in
Force
Order
Qty
Order
Price
Filled QtyAvg. FilledPriceRemaining Filled
Qty
GTC10,0007001500070015000 added to
order book
FOK10,00070010010000 canceled
IOC10,0007001500070015000 canceled

If GTC is taken, 5000 contracts would be immediately filled, with the other 5000 added to the order book, waiting to be executed.

If FOK is taken, nothing would be filled, and the order would be canceled, as there are not enough contracts (10,000) in the order book to fill the order.

If IOC is taken, 5000 contracts would be filled, at 7001 USD, with the remaining orders being canceled.

To partially or fully close a position, a Take Profit Limit Order could also be used, meaning a position is closed when a certain level of profit is met.

Reduce-Only can also be as an additional option when playing Limit Orders to ensure your position is not increased unintentionally. Check out this guide on how to use Reduce-Only.

A Conditional Order is an advanced type of order more often used by more experienced traders. These orders are submitted automatically when the trigger price is met.

A Conditional Market Order will be immediately filled once the trigger price meets the last traded price, while a Conditional Limit Order will be submitted to the order book, and only be filled once the last traded price reaches the preset order price.

Traders can use Conditional Orders indirectly to set up Stop Orders. This can be advantageous when traders want to trade a breakout in the market. Check out this guide on how to set up Stop Orders for a detailed explanation.

To ensure Limit Orders will enter the order book and receive a maker rebate when their orders are executed, traders can use Post-Only Orders when placing Limit or Conditional Orders. Check out this guide on how to set up Post-Only Orders to find out how.

One of the other advantages of perpetual contracts is that you can use up to 100x leverage. This allows traders to borrow effectively borrow from an exchange to give themselves bigger positions. The guide to margin trading in crypto gives a detailed explanation of how to use leverage effectively.