Bitcoin got a shot in the arm on Tuesday, as the world’s largest derivatives exchange (where investors take bets on investments like gold and oil) announced it will launch bitcoin futures contracts.
What Does This Mean?
Futures are agreements to buy or sell something at a certain price at a future date, giving investors greater flexibility when investing and mitigating risks. An airline, for instance, may want to buy oil futures that allow it to buy oil next year at a price agreed today, in order to better predict its costs. Derivatives exchanges make it easier for investors to trade futures by offering a marketplace with set rules.
Leading derivatives exchange CME Group said it will launch bitcoin futures by the end of the year, pending regulatory approval. Bitcoin prices jumped nearly $200 after CME Group announced it would trade futures tied to the currency. This comes a few months after another major exchange, CBOE, also said it would introduce bitcoin futures. If successful, these moves will offer investors new ways to bet on bitcoin, including betting against it (which is currently tricky to do).
Right now, if investors want to bet on the price of bitcoin, the only real way to do it is to buy bitcoin. That's not only potentially inflating the price of bitcoin but also making it harder to determine the currency's true value. One expert estimates that nearly a third of the transactions in the currency could just be traders swapping it, making it look more used as a medium of exchange than it truly is.
BTW bitcoin exchanges have been plagued by hacks. The CME's bitcoin contract will trade and settle, somewhat ironically, in dollars. The virtue of that is traders can bet on the price of bitcoin without the fear of the bitcoins in their accounts being hacked. And the CME trading venue removes counterparty risk as well.
Why Should I Care?
For markets: This is a big step forward in bitcoin becoming a “grown-up” financial product.
Bitcoin futures would be traded alongside futures of other commodities, such as oil. It would make it easier for Wall Street banks to run bitcoin trading desks as they could mitigate their exposure to bitcoin using futures. This, in turn, would make it easier for traditional institutional investors like asset managers to bet on the price of bitcoin going up or down. It all feeds into the growing ecosystem around the cryptocurrency.
For the cryptocurrency: Bitcoin benefits from having futures.
The benefits to bitcoin investors of the futures include greater “liquidity” (the ability to buy and sell it more flexibly). In theory, this should promote more accurate pricing of bitcoin because more investors can take part and, crucially, it’s possible to bet against the currency. It’s quite possibly good for bitcoin’s price in the long term as it encourages more investors to partake; however, it also allows more investors to sell the currency, potentially putting downward pressure on bitcoin’s price.
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