More and more financial institutions are starting to add financial products to Bitcoin. Examples include NASDAQ, CME Group and CBOE, which have announced the addition of Bitcoin futures to their marketplaces. These announcements made a lot of noise, suggesting a new financial paradigm for Bitcoin. However, the operation of derivatives is not easy, and today we will try to understand the operation of futures.
Futures contracts on Bitcoin?
The futures contract or futures contract, allows to bet on the positive or negative evolution of the price of the underlying asset. In this case, the underlying asset of the futures contracts we are going to talk about is Bitcoin.
A little history
Futures contracts appeared in the nineteenth century in the United States on the commodities market. They allowed producers to set a selling price for their crop.
If the price of the raw material sold increased, the producer was a loser.
On the other hand, if the price of the raw material sold decreased, the producer was the winner.
Originally, futures contracts thus enabled producers to protect themselves from price fluctuations on the markets by anticipating the selling price of a crop in a futures contract.
Futures are today the first financial instrument traded in terms of volumes, several billion dollars a day. The last step in the evolution of these contracts is their application to Bitcoin.
A little vocabulary
To understand, we will have to play with several notions:
the underlying: the asset that one commits to buy or sell. In our case, it is Bitcoin.
the term or deadline: the date on which one undertakes to carry out the operation
the price: the amount to which one commits to sell or buy the underlying.
the tick: the minimum variation of the price
the quotation: expressed in euros
quantity: minimum number of assets
The Euronext trading rules, which govern most financial instruments at European level, define them as:
"Commitment, at a specified price and date; - for the buyer to take delivery and settle the underlying asset, - for the seller to deliver and receive the settlement of the underlying asset ".
The advantage of this contract is that it allows you to sell or buy an asset at a price determined in advance.
How does a futures contract work?
Buyer or seller of a futures contract
There are two ways to position yourself in relation to a futures contract.
The trader may want to sell the contract, he takes a short position. He is therefore speculating on a fall in the price of Bitcoin;
Conversely, the trader may want to buy this contract, he takes a long position. This position allows to bet on a rise in the price of Bitcoin.
To illustrate our remarks we will take the example of the contracts proposed by the CBOE during the launch. According to CNBC, the most traded contract at the opening was the one expiring on January 17, 2018. Our example will be based on a contract for 3 bitcoins that will expire on January 17, 2018. At the time of future the price of Bitcoin was around $ 15,000, so our contract is worth $ 45,000 (3 * 15,000). At the end of this one, on January 17, 2018, the person having the contract will be delivered 3 Bitcoin to 15 000 $ unit whatever the course of the Bitcoin.
Security deposit and tick
Our trader has therefore bought a futures contract whose underlying is 3 bitcoins worth $ 45,000 in total. Before becoming the owner of the contract, he will have to pay a security deposit to the CBOE. The value of the deposit is 10% of the value of the contract, in this case $ 4,500 (45,000 x 10%). Once the deposit is made, the trader takes a long position, he bet on the rise of Bitcoin price compared to the purchase price ($ 15,000).
Each stock market fixed its tick, the CBOE fixed its $ 10, which means that upward or downward variations of less than $ 10 will not be taken into account. So these variations below the tick, do not lead to loss or gain. If the price of Bitcoin increases by 5 ticks so $ 50 ($ 510), the trader with a contract on 3 Bitcoins wins $ 30 per tick (310), so $ 150 (3 * 50). If the price drops by $ 50, the trader will lose $ 150.
The framing of price fluctuations
Each financial actor will establish a maximum amplitude of daily fluctuation, beyond which the market is automatically interrupted. We are talking about :
limit up if it's up;
limit down if it's a drop.
The CBOE set two 10% and 20% limits.
When the price changes by 10% compared to the previous day's closing price, the market will be interrupted for 2 minutes;
If on the same day the price changes by more than 20% the market will be interrupted for 5 minutes. Finally, the Exchange reserves
