Using Derivative Exchange Data For Bitcoin Trading

There’s no denying that the crypto trading market has garnered an increasing amount of traction in recent years, as highlighted by the fact that the investor revenue associated with this segment is set to scale up to a whopping US $42.69bn by 2023. Moreover, this metric is expected to grow at an annual rate of 14.36% over the next five years, taking its cumulative valuation to a whopping $73.01bn by 2027.

This increased interest in the digital asset market has come with a wealth of new data sources for traders to use. One particularly useful type of data that has become widely available in recent years is that info derived from derivative exchanges, which provides traders with a plethora of nuanced statistics, allowing them to make more informed trading decisions.

To this point, derivative exchange data — such as that harnessed from futures and options based on bitcoin price — allows traders to better understand market sentiment and identify potential trading opportunities. For example, data on open interest and trading volume can provide insight into the level of activity in the market and can be used to identify pervading trends and patterns. 

Similarly, data on order book depth can also be used to identify areas of support and resistance in the market. One of the key benefits of using derivative exchange data for bitcoin trading is that it can provide traders with a more holistic view of the market, something that can be particularly useful for those individuals looking to gain exposure to the bitcoin ecosystem but are hesitant to invest directly in the spot market. 

Derivative exchange data worth considering

In addition to the information sets presented above, there are also other key metrics that traders can utilize to their advantage. For example, they can make use of funding rates, a data subset that indicates market sentiment, while also allowing users to identify potential trading opportunities such as arbitrage and overleveraged positions. 

For example, if the funding rate is positive, it may indicate that the market is bullish, and traders may want to consider taking long positions. Additionally, if the funding rate on one exchange is significantly different from the funding rate on another, it may indicate an arbitrage opportunity. Moreover, this information can be used in conjunction with other time-tested markers to make more informed trading decisions.

That said, it’s important to note that funding rates can be affected by the prevailing market conditions at any given time, such that during a downturn, traders with long positions may have to pay a higher funding rate to keep their positions open, while short traders may receive a higher funding rate. 

Another key metric worth checking out in this regard is open interest, which measures the number of outstanding contracts on a financial derivative. If the open interest rises, it may indicate that the market is bullish and traders may want to consider taking long positions (and vice versa). 

Furthermore, open interest can also be used to identify potential market manipulation or wash trading. For example, if there’s a sudden spike in open interest without a corresponding increase in trading volume, it may indicate that market participants are artificially inflating open interest numbers. 

Other important metrics worth considering

Premium Index

Premium index, also known as implied volatility or skew, is a metric that measures the relative difference in the price of a call option and a put option associated with a particular asset. A positive premium index indicates that call options are more expensive than put options, which in turn suggests that market participants are bullish on the asset. 

To elaborate, by comparing the premium index across different strikes and expiration dates, traders can identify the volatility skew in the market. A high volatility skew can indicate that options at different strikes are priced differently and this can be used to identify potential opportunities for volatility trades.

Taker buy/sell ratio.

The taker buy/sell ratio is a metric that measures the ratio of taker orders (orders that are executed immediately and take liquidity from the order book) to maker orders (orders that are placed on the order book and wait to be filled) on a particular exchange or market. A high ratio can indicate that the market is bullish and that traders are actively buying bitcoin. It can also be used to identify the level of liquidity in the market, i.e. a higher ratio indicates high liquidity, while the opposite indicates the opposite.

The final word

Using derivative exchange data for bitcoin trading can provide investors with a wealth of information that they can use to make more informed decisions. Simply put, this data can provide insight into market sentiment, identify potential trading opportunities as well as provide traders with a more complete picture of the market. It can help a tremendous amount of traders to make use of a Cryptocurrency Trading Dashboard. If you’re like to start trading using derivative exchange data you can start trading on the Bybit Exchange, they are by far the most comprehensive exchange with the best liquidity and trading pairs.