HODL with a Twist
CME: Micro BTC Futures ( 
MBT1!)
Federal Reserve monetary policy is the dominant market mover across asset classes. Financial markets around the world rise and fall by any hint of the next policy move.
Last Friday, US stocks jumped after a weak April jobs report boosted hopes that the Fed could start cutting interest rates soon. The Dow Jones Industrial Average gained 450 points, or 1.18%, to 38,675. The S&P 500 surged 1.26% to 5,128, while the Nasdaq Composite rallied 1.99% to close at 16,156.
The nonfarm payrolls report, released by the Bureau of Labor Statistics, showed 175,000 jobs gain in April, below the 240,000 jobs expected by Dow Jones economist survey. The unemployment rate edged up to 3.9%, versus 3.8% in March.
After the jobs report, traders now price in a second rate cut by the end of 2024. Fed funds futures trading data suggests a 66% likelihood of a 25-basis-point rate cut in September, according to the CME Group’s FedWatch tracker of futures market pricing.
Don’t Pinch Your Hope on More Rate Cuts
Investors often attempt to front run the Fed’s decisions. Track records show that they are usually wagering the wrong bet. As recently as last December, they expected seven rate cuts in 2024 and pushed major stock indexes to a series of new record highs. Lately, the rebounding inflation ditched the hopes for early rate cuts. Before last week, market consensus was down to one rate cut in 2024, with talks of no cut and even a rate hike.
In my opinion, investors speculating on rate cuts overlooked a key factor, the 2024 US Presidential Election. With election day less than six months away, the Fed would be cautious with abrupt policy moves. They tend not to shift policy directions ahead of the election, just to stay clear of any accusation of influencing the result in any way.
Many investors pinch rate cut hopes on the assumption that the Fed would ease rates to help the current Administration get reelected. They failed to understand that the Fed Chair is not a cabinet member. He reports to the Congress, not the President. The Federal Open Market Committee, the rate-setting body, is not a department in the Executive Branch. It was founded by the Congress and will report to the Congress only.
The Fed has kept the rate higher for longer than many of us expected. Since the last rate hike in July 2023, they kept the Fed Funds rate unchanged in the past six meetings.
Borrowing costs, including mortgage rate, auto financing, credit card and business loan, have all been pushed up significantly in the last two years. One or two rate cuts would not materially lessen the cost burden incurred by households and businesses.
Despite headwinds and signs of the US economy cooling off, US stocks are currently priced near their all-time high levels. It is not a good time to jump in and chase the high prices. On the other hand, shorting the market now is a risky proposition. Investors exhibit strong tolerance for bad news. The best move is to wait. Outside of stocks, cryptocurrencies show upside potentials, particularly from a long-term perspective.
Investing in Bitcoin for the Long Haul
On February 14th, I posted this trade idea, “A Bitcoin Bull Run?”. At the time, spot Bitcoin was trading at around $50,000. Bitcoin reached a new all-time-high of $73,000 on May 3rd. It has since fallen to as low as $58,000 and is now trading at $64,125.
I identified three fundamental key drivers for a secular long-term bull market for cryptocurrencies, which is recapped below:
• Firstly, there is a limited supply of bitcoins with a total cap of 21 million.
• Secondly, the demand for crypto investment could increase substantially.
• Thirdly, an excessive dollar supply could help raise bitcoin prices.
Today, I would like to focus on the technical strength illustrated in Bitcoin price chart. In the past eight years, Bitcoin managed to reach a new high four times, after experiencing significant drawdown each time.
• After peaking at $20,089 in 2017, Bitcoin fell 84% to $3,191 by December 2018.
• The next bull run, starting in September 2020, pushed Bitcoin price to a new ATH at $58,777 in March 2021. This is a gain of 192% from the previous ATH, and up 1742% from the previous low.
• Bitcoin price was cut in half to $29,562 in July, before rising to another ATH of $69,000 in November 2021. This is a gain of 17% from the previous ATH, and up 133% from the previous low.
• In the next year, Bitcoin fell to $16,625, a drawdown of 76%. The SEC approval of Bitcoin ETF pushes the benchmark cryptocurrency to its new ATH of $73,000 in March 2024. This is a gain of 6% from the previous ATH, and up 339% from the previous low.
Bitcoin price trend shows that investing in Bitcoin in the long run has been profitable. However, timing makes a significant difference in investment returns.
Trading Bitcoin with Futures Rollover Strategy
While the view of holding on for dear life (HODL) is shared by many Bitcoin investors. There are several issues when it comes to investment strategies.
Firstly, with bitcoin trading over $64,000, future price increases do not offer the same level of return dollar for dollar. Hypothetically, if Bitcoin goes back up to its ATH of
73K from 
64K, the $9,000 gain equals to 14% in return. For a comparison, if you bought Bitcoin for 17K in December 2022, the same $9,000 gain would be 53% in return. To counter the effect of higher prices, investors could consider using leverage.
CME Micro BTC futures (MMBT) provide leverage and capital efficiency. The contract notional is 1/10 of 1 BTC. Initial margin is $1,515. The June contract (MBTM4) was last settled at $63,865. At current price there is a 4.2 times leverage built in the contract, which is the ratio of 6,386.5 (1/10 of 1 BTC) divided by 1,515. If the futures price touches the previous ATH, a long futures position would gain $913 (= 7,300-6,387), and the return would be a +60%, vs. +14% investing in spot Bitcoin, as we illustrated above.
Secondly, futures contracts have a limited lifespan that will influence the outcome of your trades and exit strategy. Micro Bitcoin trades actively in the nearby May and June contracts. Liquidity in the back-month contracts has yet to pick up. A trader may be right about the long-term rise in Bitcoin prices. However, this may not happen in the next two months before the nearby contracts expire.
To maintain a long position in Bitcoin over the long run, while enjoying capital efficiency through leverage, a trader may employ a futures rollover strategy.
Rollover is when a trader moves his position from the front month contract to another contract further in the future, prior to the expiration of his existing holding.
The title chart illustrate how to hold a long Micro Bitcoin Futures (MBT) position overtime:
• In April, a trader buys (going long) a June contract (MBTM4).
• Approximately two weeks before the contract expires on June 28th, the trader enter an offsetting trade, going short on MBTM4, to close his existing position. He would book a profit or loss, determined by the difference in selling and purchasing prices.
• Simultaneously, the trader would buy an August MBT contract (MBTQ4) and reestablish a long position in Bitcoin.
• In mid-August, the trader will close out MBTQ4 (going short), and buy an October contract (MBTV4), and continue to hold a long position on Bitcoin.
• The trader would repeat the above steps, so far as he holds a bullish view.
Finally, Bitcoin prices are extremely volatile. Holding spot Bitcoin with no leverage could face potential drawdown of 70%-80%. With leverage in futures, a sharp price move in the wrong direction could quickly deplete the available fund and trigger margin calls.
One advantage Micro Bitcoin has over the spot crypto is the daily price limit. If Bitcoin moves up or down 10% within the trading day, futures trading will be halted. This will give the market time to cool off and help investors avoid being blown out by short-term panic.
Experienced investors may consider using stop loss on futures or buying a protective put options to hedge such downside risks.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
MBT1!)Federal Reserve monetary policy is the dominant market mover across asset classes. Financial markets around the world rise and fall by any hint of the next policy move.
Last Friday, US stocks jumped after a weak April jobs report boosted hopes that the Fed could start cutting interest rates soon. The Dow Jones Industrial Average gained 450 points, or 1.18%, to 38,675. The S&P 500 surged 1.26% to 5,128, while the Nasdaq Composite rallied 1.99% to close at 16,156.
The nonfarm payrolls report, released by the Bureau of Labor Statistics, showed 175,000 jobs gain in April, below the 240,000 jobs expected by Dow Jones economist survey. The unemployment rate edged up to 3.9%, versus 3.8% in March.
After the jobs report, traders now price in a second rate cut by the end of 2024. Fed funds futures trading data suggests a 66% likelihood of a 25-basis-point rate cut in September, according to the CME Group’s FedWatch tracker of futures market pricing.
Don’t Pinch Your Hope on More Rate Cuts
Investors often attempt to front run the Fed’s decisions. Track records show that they are usually wagering the wrong bet. As recently as last December, they expected seven rate cuts in 2024 and pushed major stock indexes to a series of new record highs. Lately, the rebounding inflation ditched the hopes for early rate cuts. Before last week, market consensus was down to one rate cut in 2024, with talks of no cut and even a rate hike.
In my opinion, investors speculating on rate cuts overlooked a key factor, the 2024 US Presidential Election. With election day less than six months away, the Fed would be cautious with abrupt policy moves. They tend not to shift policy directions ahead of the election, just to stay clear of any accusation of influencing the result in any way.
Many investors pinch rate cut hopes on the assumption that the Fed would ease rates to help the current Administration get reelected. They failed to understand that the Fed Chair is not a cabinet member. He reports to the Congress, not the President. The Federal Open Market Committee, the rate-setting body, is not a department in the Executive Branch. It was founded by the Congress and will report to the Congress only.
The Fed has kept the rate higher for longer than many of us expected. Since the last rate hike in July 2023, they kept the Fed Funds rate unchanged in the past six meetings.
Borrowing costs, including mortgage rate, auto financing, credit card and business loan, have all been pushed up significantly in the last two years. One or two rate cuts would not materially lessen the cost burden incurred by households and businesses.
Despite headwinds and signs of the US economy cooling off, US stocks are currently priced near their all-time high levels. It is not a good time to jump in and chase the high prices. On the other hand, shorting the market now is a risky proposition. Investors exhibit strong tolerance for bad news. The best move is to wait. Outside of stocks, cryptocurrencies show upside potentials, particularly from a long-term perspective.
Investing in Bitcoin for the Long Haul
On February 14th, I posted this trade idea, “A Bitcoin Bull Run?”. At the time, spot Bitcoin was trading at around $50,000. Bitcoin reached a new all-time-high of $73,000 on May 3rd. It has since fallen to as low as $58,000 and is now trading at $64,125.
I identified three fundamental key drivers for a secular long-term bull market for cryptocurrencies, which is recapped below:
• Firstly, there is a limited supply of bitcoins with a total cap of 21 million.
• Secondly, the demand for crypto investment could increase substantially.
• Thirdly, an excessive dollar supply could help raise bitcoin prices.
Today, I would like to focus on the technical strength illustrated in Bitcoin price chart. In the past eight years, Bitcoin managed to reach a new high four times, after experiencing significant drawdown each time.
• After peaking at $20,089 in 2017, Bitcoin fell 84% to $3,191 by December 2018.
• The next bull run, starting in September 2020, pushed Bitcoin price to a new ATH at $58,777 in March 2021. This is a gain of 192% from the previous ATH, and up 1742% from the previous low.
• Bitcoin price was cut in half to $29,562 in July, before rising to another ATH of $69,000 in November 2021. This is a gain of 17% from the previous ATH, and up 133% from the previous low.
• In the next year, Bitcoin fell to $16,625, a drawdown of 76%. The SEC approval of Bitcoin ETF pushes the benchmark cryptocurrency to its new ATH of $73,000 in March 2024. This is a gain of 6% from the previous ATH, and up 339% from the previous low.
Bitcoin price trend shows that investing in Bitcoin in the long run has been profitable. However, timing makes a significant difference in investment returns.
Trading Bitcoin with Futures Rollover Strategy
While the view of holding on for dear life (HODL) is shared by many Bitcoin investors. There are several issues when it comes to investment strategies.
Firstly, with bitcoin trading over $64,000, future price increases do not offer the same level of return dollar for dollar. Hypothetically, if Bitcoin goes back up to its ATH of
73K from 64K, the $9,000 gain equals to 14% in return. For a comparison, if you bought Bitcoin for 17K in December 2022, the same $9,000 gain would be 53% in return. To counter the effect of higher prices, investors could consider using leverage.CME Micro BTC futures (MMBT) provide leverage and capital efficiency. The contract notional is 1/10 of 1 BTC. Initial margin is $1,515. The June contract (MBTM4) was last settled at $63,865. At current price there is a 4.2 times leverage built in the contract, which is the ratio of 6,386.5 (1/10 of 1 BTC) divided by 1,515. If the futures price touches the previous ATH, a long futures position would gain $913 (= 7,300-6,387), and the return would be a +60%, vs. +14% investing in spot Bitcoin, as we illustrated above.
Secondly, futures contracts have a limited lifespan that will influence the outcome of your trades and exit strategy. Micro Bitcoin trades actively in the nearby May and June contracts. Liquidity in the back-month contracts has yet to pick up. A trader may be right about the long-term rise in Bitcoin prices. However, this may not happen in the next two months before the nearby contracts expire.
To maintain a long position in Bitcoin over the long run, while enjoying capital efficiency through leverage, a trader may employ a futures rollover strategy.
Rollover is when a trader moves his position from the front month contract to another contract further in the future, prior to the expiration of his existing holding.
The title chart illustrate how to hold a long Micro Bitcoin Futures (MBT) position overtime:
• In April, a trader buys (going long) a June contract (MBTM4).
• Approximately two weeks before the contract expires on June 28th, the trader enter an offsetting trade, going short on MBTM4, to close his existing position. He would book a profit or loss, determined by the difference in selling and purchasing prices.
• Simultaneously, the trader would buy an August MBT contract (MBTQ4) and reestablish a long position in Bitcoin.
• In mid-August, the trader will close out MBTQ4 (going short), and buy an October contract (MBTV4), and continue to hold a long position on Bitcoin.
• The trader would repeat the above steps, so far as he holds a bullish view.
Finally, Bitcoin prices are extremely volatile. Holding spot Bitcoin with no leverage could face potential drawdown of 70%-80%. With leverage in futures, a sharp price move in the wrong direction could quickly deplete the available fund and trigger margin calls.
One advantage Micro Bitcoin has over the spot crypto is the daily price limit. If Bitcoin moves up or down 10% within the trading day, futures trading will be halted. This will give the market time to cool off and help investors avoid being blown out by short-term panic.
Experienced investors may consider using stop loss on futures or buying a protective put options to hedge such downside risks.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
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