This is the free translation of an article published by CoinDesk this morning, entitled "The Threat of Bitcoin Futures", which we thought was interesting. It was written by Noelle Acheson, a researcher specializing in blockchain technologies, and a member of the CoinDesk teams. Do not hesitate to consult the article of origin by clicking on this link.
The financial press has shuddered in recent days with the advent of Bitcoin futures on two major regulated trading platforms: the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (CBOE).
CME Group, the world's largest futures exchange trading company, but also the oldest, will buy and sell these famous future Bitcoins as early as 18 December. For its part, CBOE Global Markets, the company that manages the Chicago Board Options Exchange and the financial company BATS, took the lead, and should offer these contracts next Sunday.
These initiatives will open the door for institutional investors and savers who want to expose themselves to Bitcoin assets ... without having to buy them. The reasons that would encourage them to favor this mode of investment can be many: strict internal rules, mistrust vis-à-vis platforms specialized in cryptocurrency, fear of making mistakes using a bitcoin wallet, ...
From what I hear, the arrival of these futures contracts could be partly responsible for the rise in the price of Bitcoin beyond $ 11,000.
But if it is, there is something I do not understand: I do not know why the market believes that these new financial derivatives will likely cause a significant increase in demand for Bitcoin assets. .
How do these futures work?
Homer DerivativesFirst, let's look at how futures work.
Imagine that I think the price of XYZ, which is currently trading at $ 50, will increase to $ 100 within two months.
Someone offers me the opportunity to pledge to pay $ 80 to get in two months XYZ. I accept, which means that I just "buy" a future. If I'm right, I would pay in two months 80 dollars to get something that would be worth 100. If I'm wrong, and the price goes down, I should pay more than the market price, and I will not be happy.
Conversely, if I think that the price of XYZ will decrease, I will "sell" a futures contract. I will commit to delivering XYZ in two months for a price set in advance, say 80 dollars. When the contract expires, I will buy XYZ at the market price and deliver it to the contract holder for the amount.
If I were right, and the market price is below $ 80, I will be able to make a profit.
But beyond these rather simple strategies, many "hybrid" strategies can be used to "cover" a position.
These consist of holding the underlying asset (in this case, XYZ) and selling a futures contract (I agree to resell the asset in two months) for a price higher than the price of the market.
If the price goes up, I make money from XYZ - but I lose it with the futures contract. And it's the opposite if the price of XYZ decreases.
Finally, note that another commonly used strategy is to simultaneously buy and sell futures to "freeze" a price.
These contracts are now used for a wide range of assets and financial instruments, and may have many conditions.
It is a complex playground, which drains considerable amounts. An example ? The gold futures market is about 10 times the size of the "physical" gold market.
How is it possible ? How can you have more gold as an underlying than "real" gold?
The reason is simple: you do not have to provide a gold bullion when the contract comes due. Many futures contracts are settled "in cash": rather than delivering the assets on which the contract is contracted, the buyer will immediately receive the difference between the contracted price (future prices) and the market price. (spot price).
If the XYZ futures contract is based on a "cash settlement", and the market price is $ 100 at the end of the two months (as I predicted), instead of receiving shares from XYZ, I will receive $ 20. That amount is the difference between $ 100, the market price, and $ 80, the amount that I was hired to pay.
WEC and CBOE will both propose cash settlements - not Bitcoins.
And we can easily understand why: Imagine for a moment the legal and logistical issues that would have emerged if two exchange scholarship also known and regulated had to set up trust services and install Bitcoin wallets.
As a result of these cash settlements, it is likely that the Bitcoin futures market will one day become more important than the "real" Bitcoin market.
Possible collateral damage
Collateral DamageThese items are particularly important. Why ? Because institutional investors will appreciate: The size and liquidity of a market allow fund managers to feel more comfortable with speculative assets.
In addition, note that CBOE and CME have put in place mechanisms that will "freeze" contracts in the event of excessive movements in the price of digital currency. They also provide for higher margin calls than for other assets. Everything is done to limit the risks associated with an underlying that is considered extremely volatile, and to reassure investors.
The Bitcoin market seems enthusiastic about the arrival of these new liquidities, and seem to think that all these sums will be poured directly into Bitcoin. And that's what I have a hard time understanding.
It is true that the fact that it is possible to speculate, from a regulated and liquid platform, on Bitcoin, this mysterious asset that has produced huge returns on investment, could encourage some institutional investors to take an interest in this asset. Many hedge funds, which are not allowed to position themselves on "alternative assets" or to use unregulated trading platforms, will now be offered the opportunity to speculate on Bitcoin.
Moreover, the opportunity to leverage, a mechanism to increase its returns on investment, may lure very speculative funds.
But there is one thing to understand: all these sums are not going to be poured on the Bitcoin market. They will only be used to buy financial derivative products, which will not have a direct impact on Bitcoin.
Whenever SupermergahedgefundX places $ 100 million in future Bitcoins, there will not be a cent going into Bitcoin. As we have seen, these futures contracts do not force investors to hold Bitcoins, not even when they are settled.
Of course, some will argue that investment funds will now be more interested in buying "real" Bitcoins, now that they have the opportunity to hedge their positions with these contracts.
Thus, if SupermergahedgefundX is offered the opportunity to offset its potential losses with futures, then perhaps it will be more able to buy Bitcoins - even if one can ask the question of the reasons that could to buy such contracts if he is firmly convinced of an upcoming rise in Bitcoin prices.
In addition, why hold Bitcoins if it is possible to generate similar profits by simply buying futures?
That's the thing that worries me the most. Why buy Bitcoins while you can buy a futures contract? Or even a combination of futures, which could potentially increase your earnings or limit your losses?
In other words, I am concerned that institutional investors, who might have been tempted by a purchase of Bitcoins, are content with the futures market. A more "clean" market, cheaper, safer and better regulated.
Warning…
I'm even more worried about the possibility that investment funds that have already bought Bitcoins (and thus contributed to the price levels that we can currently see) will decide that an official futures market is safer. They can then be encouraged to resell their Bitcoins to favor these futures.
Now, it is possible that the demand for Bitcoin futures, but also the near-universal optimism that prevails at the moment, will push up futures prices. In other words, there will be more demand for contracts involving a commitment to buy Bitcoins for $ 20,000 in a year, than those that involve a commitment to buy Bitcoins at $ 12,000 - I know markets are sometimes strange.
Moreover, the arrival of these contracts will likely influence the "true" market price ("Hey, the futures market hold information we do not have, do we?"). They may also increase the likelihood that the US Securities and Exchange Commission (SEC) will permit the launch of an ETF on Bitcoin in the near future. This will bring additional funds within a space that will probably be already very crowded.
But it is also possible that institutional investors who are currently hostile to Bitcoin (and there are many) rely on futures markets to speculate on the decline of the digital currency. These investors would send negative signals to the "real" Bitcoin market.
There are also the consequences of the leverage inherent in futures contracts, especially those that are subject to cash settlement. This could increase the volatility of Bitcoin.
It's rather terrifying.
Especially since the arrival of these future Bitcoin positions BTC more as a commodity than as a currency (in the United States, the Commodity Futures Trading Commission is responsible for regulating the futures markets) . And it positions it more as a financial asset in which it is possible to invest, than as a technology with high potential, which could disrupt the functioning of financial institutions.
Therefore, while the market looks set to host the launch of futures on two exchange exchanges in the coming days (with two other platforms expected to follow suit next year), we need to see this. arrival as the beginning of a new era.
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