Hello once again fellow Steemians!
This time we're in for a ride.
As you may or may not know this, Bitcoin futures is going to be traded in CME (http://www.cmegroup.com/) which is the largest derivatives exchange in the world, as well as one of the oldest.
But not only CME will be trading Bitcoin futures, as CBOE Global Markets, which owns the Chicago Board Options Exchange (the largest U.S. options exchange) and BATS Global Markets intend to make a move as well in Bitcoin Futures.
CBOE Global Markets is scheduled to start trading on Dec. 10th
CME is scheduled to start trading on Dec. 18th
"Alrighty, cool, but what does all that mean guys??"
We'd say this is where the plot thickens - and just how much, we will see in the coming weeks.
You see, Bitcoin Futures is quite different to holding the real coin in itself .
Let's get an overview of how futures work :
Let's say that I think that the price of Bitcoin which is currently trading at $15.000 , will go up to $20.000 in two months.
Someone offers me the chance to commit to paying $18.000 for Bitcoin in two months' time.
I accept, which means that I’ve just "bought" a futures contract - I am essencially betting on Bitcoin's future.
If I'm right, I’ll be paying $18.000 for something that's worth $20.000.
If I'm wrong, and the price is lower, then I’ll be paying more than it's worth in the market - which means I will lose the gamble.
Alternatively, if I think that Bitcoin is going to go down in price, I can "sell" a futures contract:
I commit to delivering Bitcoin in two months’ time for a set price, say $12.000.
When the contract is up, I buy Bitcoin at the market price, and deliver it to the contract holder in return for the promised amount.
If I'm right and the market price is lower than $12.000 I've made a profit - and this is also known as "shorting" the market.
But this is just the basis of trading futures, there are a lot more complex strategies when dealing with futures.
It's a complex field that moves a lot of money. The futures market for gold is almost 10x the size (measuring the underlying asset of the contracts) of the physical gold market.
How can this be? How can you have more futures contracts for gold than actual gold?
Because you don’t have to deliver a bar of gold when the contract matures.
Many futures contracts settle on a "cash" basis – instead of physical delivery for the sale, the buyer receives the difference between the futures price, the agreed-upon price, and the market price.
The Good
Institutional investors will like futures. Size and liquidity make fund managers feel more secure than usual.
The Bitcoin market seems to be excited at all the institutional money that will come pouring into bitcoin as a result of futures trading -
but should we?
It’s true that the possibility of getting exposure to Bitcoin, will without doubt entice serious money to take a swing at Bitcoin.
Many funds that are by charter prohibited from dealing in “alternative assets” on unregulated exchanges will now be able to participate.
And the opportunity to leverage positions to magnify the already outrageous returns will almost certainly attract funds that need the extra edge.
The Bad
But here’s the catch: All this money will not be pouring into the Bitcoin market.
It will be buying synthetic derivatives that don’t directly impact bitcoin at all
For every $50 million or whatever value that WhateverEdgeFund puts into Bitcoin futures, no extra money goes into bitcoin itself.
These futures do not require ownership of actual bitcoins, not even on contract maturity.
" Gee, guys, but that way more funds will be interested in holding actual bitcoins now that they can hedge those positions!"
If WhateverEdgeFundcan offset any potential losses with futures trading, then maybe it will be more willing to buy bitcoin – why hold the bitcoin when you can get similar profits with less initial outlay just by trading the synthetic derivatives?
So... Why buy bitcoin when you can go long a futures contract? Or a combination of futures contracts that either exaggerates your potential gains or limits your potential loss?
In other words, institutional investors that would have purchased bitcoin for its potential gains will now just head to the futures market.
Which for them is seen as cleaner, cheaper, safer and more regulated.
The Ugly
We are running out of precious time. Soon, Bitcoin will either be pumped to another galaxy or buried so far underground it will be like it never existed.
This is to say, that Bitcoin futures trading will have either some really good effects, or very, very nasty and everlasting ones.
And this pretty much covers our Bitcoin Futures post! If you guys enjoyed and have further comments - lets pool our efforts and spread the word!
Love from us at Primus Investing!