Why Hedged Crypto Futures Spreads Can Still Be Liquidated
Summary
This article explains why a long and short futures position with similar dollar values is not risk free. The trader remains exposed to changes in the price difference between contract expiries, and that spread can move sharply against the position. The example uses Bitcoin contracts during the March 2020 selloff, when the market shifted from contango to backwardation and the long leg’s loss exceeded the short leg’s profit.
It connects spread losses to leverage and margin mechanics: less collateral leaves less room for adverse moves, while falling Bitcoin prices can increase the amount of BTC needed to support fixed-dollar positions. Volatile markets can also disrupt the usual co-movement between expiries as liquidity falls, spreads widen, and forced trading intensifies. The figures illustrate one historical episode and one exchange’s margin formula at the time; they do not establish how every spread or venue will behave. The core lesson is to monitor spread exposure and maintenance margin rather than assume the legs cancel perfectly.
Key ideas
- A futures spread is exposed to changes in the price difference between its contract legs.
- Equal dollar values in opposing legs do not guarantee equal and opposite profit and loss.
- High leverage reduces the adverse spread move that an account can withstand before liquidation.
- Falling Bitcoin prices can raise BTC-denominated margin requirements for fixed-dollar positions.
- Liquidity stress can cause contract prices to diverge unpredictably and intensify liquidation risk.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.