How many retail investors understand the futures market?
My guess is not many. The problem is that many Bitcoin holders are very jumpy retail investors.
So we all need to have a basic understanding of what Bitcoin Futures are and what they mean for the price of Bitcoin.
Futures Markets
These are not a new invention, in fact, even in ancient times, people used futures contracts to help with price stability and to reduce risk
"In Ancient Mesopotamia, around 1750 BC, the sixth Babylonian king, Hammurabi, created one of the first legal codes: the Code of Hammurabi. Hammurabi’s Code allowed sales of goods and assets to be delivered for an agreed price, at a future date; required contracts to be in writing and witnessed; and allowed assignment of contracts. The code facilitated the first derivatives, in the form of forward and futures contracts. An active derivatives market existed, with trading carried out at temples." - Wikipedia (https://en.wikipedia.org/wiki/Futures_exchange#Ancient_times)
The aim of a futures contract is to allow a purchaser or a seller to know what price they will execute a trade at a future date and thus removing the worry in regards to price volatility.
They work by having a standard contract for the purchase or sale of an asset at a future date. The price of this contract can vary and will normally converge to the market price as the date of the contract draws near. As the contracts are standardised, you can sell your contract to someone else before the execution date.
For example, a futures contract for oil to be delivered on June 2019 may be priced at $100, while the current market value is $80, therefore the market expects the price to rise over the next year. You can either buy the oil now and hold it until you need it, or buy the futures contract and know that the most you will pay is $100 in a years time. You may be paying more or less than the market price in June 2019, but you have removed all your market price risk.
How Will Futures Contracts Effect Bitcoin?
In theory, the Futures Market should bring more stability to the market as traders can know in advance what price they will be able to trade at in the future, rather than just guessing and hoping.
We can see from this data at the CME Group's Futures Market, what the expectations are for future Bitcoin prices;
As you can see, Bitcoin futures are trending up, with $6,485 in June, $6,540 in July and $6,575 in September (not sure why their August contract doesn't show a price!). The current price of Bitcoin is $6,558.
What does this mean for Bitcoin Hodlers? Well, if you think Bitcoin will fall massively and are worried, you can buy a futures contract to sell your Bitcoin at $6,575 in September, that way even if the market went down to $1,000 - you can sell your Bitcoin for $6,575 at the execution date of the contract. But if the market goes through a bull run, you will miss out on any gains as you will have to fulfil your contract at that price.
What does this mean for Bitcoin as a whole? Generally, having a Futures Market can bring a lot more stability and liquidity into a market. And more importantly, all these futures markets will have to hold some Bitcoin to hedge their positions. Which is good news for the Cryptocurrency Market.
Summary:
Futures Contracts will bring more stability to the Bitcoin price and with that will be more institutional money. Both things are good for the cryptocurrency market in my view. This won't happen overnight and I expect the volatility to continue for a while yet.
Disclaimer:
*This is not financial advice, (unless you want to give me a share of your profits!), your losses are your losses and your gains are your gains! And before all the finance techies come and complain, I am aware I have simplified this and that was the point, to make it a little more understandable *