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The “future” of Bitcoin futures

February 21, 2018 11:52 am Published by

Bitcoin’s stellar run continues with prices leaping one major psychological hurdle after another. It’s been painful for investors stuck on the sidelines. Last year alone, Bitcoin (BTC) is up more than 17-fold. The surge has been driven largely by demand from individuals, with technical obstacles keeping out most big money managers like mutual funds. However, with the introduction of Bitcoin futures, the main cryptocurrency might be heading toward the realm of regulators, banks and institutional investors.

A big milestone

Bitcoin futures can be seen as one of the biggest milestones for Bitcoin since it emerged in the wake of the 2008-09 financial crisis. Bitcoin futures are expected to bring transparency and efficient price discovery to the ecosystem. Futures are an agreement to buy and sell a certain product at a certain date. In more detail, they are a legally binding agreement between two counterparties to trade a given asset at a future date and a given price. Here, an exchange stands as a guarantor to both counterparties. Therefore, you may be able to trade the Bitcoin market anonymously, but you cannot do the same with futures.

Here comes CBOE & CME

Both the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) Bitcoin futures are cash-settled, meaning there is no actual exchange of Bitcoin (BTC) involved but rather there’s only a cash payment between the agreed upon price and the actual market price at this future point of time.

For example, if John buys a 7-month BTC futures contract from Mary with a $14,000 settlement price. Let’s assume that on that day 7 months from now, the actual price of BTC is $19,000. Instead of Mary fulfilling the contract by selling John a bitcoin for $14,000 and John taking it to an exchange to sell it for $19,000, Mary will simply give John the $5,000 difference.

The CBOE Global Markets Inc launched Bitcoin futures contracts on Dec. 10 and CME Group Inc launched its own Bitcoin futures contract on Dec. 17. The CBOE Bitcoin futures contract uses the ticker XBT and will equal one Bitcoin; whereas, the CME Bitcoin futures contract will use the ticker BTC and will equal five Bitcoins.

In addition, CBOE’s contract is priced off of a single auction at 4 p.m. eastern time (2100 GMT) on the final settlement date on the Gemini cryptocurrency exchange. The CME’s contract will be priced off of the CME Bitcoin reference rate, an index that references pricing data from cryptocurrency exchanges, currently made up of Bitstamp, GDAX, itBit and Kraken.

BTC futures surged as much as 26 percent in their debut session on CBOE Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market. Initial volume exceeded dealers’ expectations, while traffic on CBOE’s website was so heavy that it caused delays and temporary outages. Bitcoin’s spot price rose.

The notional value of contracts traded in the first eight hours totaled about $40 million. Globally, about $1.1 billion of Bitcoin traded against the U.S. dollar during the same period, according to Cryptocompare.com. In this regard, the introduction of BTC futures trading is an important milestone for Bitcoin’s shift from the fringes of finance toward the mainstream, but it could be some time before the cryptocurrency becomes a key part of investor portfolios.

Future trading in other markets

Futures, when it comes to other markets like oil and agricultural products, are usually the bigger market, so it really shows how slow the Bitcoin futures market has begun. But, one effect of BTC futures trading will be the increase in BTC volume itself, while reducing BTC volatility bringing more liquidity.

For starters, the introduction of Bitcoin futures has already had a upward affect on the “spot” or Bitcoin price. It looks like Bitcoin believers are more convinced than ever that the cryptocurrency is here to stay. Even more demand for Bitcoin futures could also serve to push up Bitcoin prices, as it would be a sign that some more established investors may be growing bullish in Bitcoin.

Bitcoin futures, which started on CBOE, and will soon be on CME and even Nasdaq, have all the draw for institutionalized investors, this would also open up the cryptocurrency market to a massive influx of new (old) money.

So far, Bitcoin has been mostly traded in an unregulated environment. These products represent the first institutional instrument to truly bridge the gap between traditional capital markets and the world of cryptocurrency, which brings some air of legitimacy to Bitcoin and the entire cryptoasset markets. The Bitcoin futures will allow exposure of the digital asset class to mainstream portfolios for the first time, as funds will be able to participate in the cryptocurrency market without actually purchasing cryptocurrency itself.

It’s expected that the futures will have a stabilizing effect on the Bitcoin price fluctuations. Reducing volatility is important in order to restore Bitcoins utility as a medium of exchange and with very low volatility we might even see Bitcoin increasingly being used as an unit of account, which (together with the store of value function) would complete the three main requirements for being a currency.

So what’s the future look like?

Of course, it is still really early days as far as Bitcoin futures, and despite the interest and mainstream acceptance of Bitcoin, there is still very much to wait-and-see. Wait and see may also be affecting Bitcoin futures as those of the fringes wait for those in the middle to feel the full brunt of a Bitcoin future. Even time itself will help the trading volume rise, and the addition of other companies offering futures.

Bitcoin is going mainstream, and Bitcoin futures contracts are expected to be part of this transition. For the first time, U.S. traders will be able to have a stake in Bitcoin without having to own it outright.

That’s good news!

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