Cboe Bitcoin futures launch today, but how will this affect the cryptocurrency market? Cboe Futures Exchange, LLC (CFE) will begin trading in Cboe bitcoin futures at 6:00 PM EST, today December 10 under the ticker symbol "XBT." CBOE group believes that traders will benefit from BTC futures because the products implementation will create transparency, efficient price discovery, deep liquidity, and centralized clearing relative to the bitcoin market. In promotion of this financial event, CFE will waive all transactions fees during the month of December.
Futures trading in bitcoin presents several challenges for the crypto space as well as for the legacy financial system. One should call to mind the financial crisis of 2008 which devastated both Wall Street and Main Street in the United States, perhaps the latter more so than the former. After several years of economic recession and tedious legislative reform, the US has arrived at relative stability in the economy and even a robust stock market. In October of 2007, the Dow Jones Industrial Average reached an all-time high of 14,198.10, only to collapse 17 months later to nearly 50% in value. The collapse, blamed largely on mortgage backed securities, was a consequence of the overall derivatives market. Similarly, cryptocurrency may soon be faced with its own derivatives crisis in the form of BTC securities.
How will the futures process work? Well, XBT futures are cash-settled contracts based on the Gemini's auction price for bitcoin, denominated in U.S. dollars. CBOE investors are required to place margins of 44%, this is an unusually high margin which may be good for stability in the short-term. An example of how this works is as follows:
Initial transaction
- Investor places an order through CBOE for 10 XBT or approximately of $150,000 today's priced bitcoin
- Investor bets that the price of 10 BTC will be $100,000 in two weeks time
- Investor puts forward 44% of $100,00 or approximately $44,000.
Results
- BTC price falls to $10,000
- Futures cost is now $100,000 for 10 XBT
- Investor pays the difference of $100,000 and the $44,000 initial margin
- Investor now owns 10 XBT or 10 BTC
How will this affect the average bitcoin investor and the crypto market? Depending on whether the majority of XBT futures orders are short or long, the price of bitcoin may drop or raise radically. If there is an overwhelming short of the market, it is possible for institutional investors to drop bitcoin's value dramatically. For a few ideas of how this could play out, please consult Chris Dunn's discussion about the impact of bitcoin futures.
NOTE: This is not financial advice, this is purely for educational and/or entertainment purposes. Invest or divest at your own risk, be responsible.