Bitcoin price has grown so much to capture the mainstream press, that is, it has hit a new record and price, and growth rate. Just two months ago, the price of a coin was somewhere between $ 4-5,000 and $ 10,000 to $ 11,000 grew over a single day.
What are Future Contracts - Growth is justified by the fact that the bitcoin had the so-called institutional adoption after two of the world's most important stock market operators, Chicago Mercantile Exchange (CME) and Chicago Options Exchange (CBOE) announced that they will list future contracts for the bitcoin currency.
An increase of $ 1,000 from one day to the next may be considered somewhat proportionate to the importance of the ad, especially if we take into account that the bitcoin market is governed by investors' emotions.
CMEs are already listed on the futures markets for corn, soy, precious metals, oil, Standard & Poor index, or NASDAQ. More recently, the bitcoin will also appear in the list of products. Bitcoin is attractive to this type of contract precisely because it is extremely volatile and can create a dynamic future market.
What are Future Contracts?
The futures market may best be described as a betting game between the parties, on the increase or decrease of the price on an asset. On Investopedia, future contracts are explained as legal agreements generally made at futures exchanges to buy or sell a product or financial instrument at a predetermined price at a certain time in the future. "Future contracts are standardized to facilitate transactions with a future stock market operator and, depending on the assets traded, to determine the quality and quantity of the products."
For bitcoin, the definition does not apply point-to-point. Both CME and CBOE have clearly said they will not trade, hold and send bitchers. The two operators intend to work strictly in dollars and only relate to the bitcoin price. Future contracts must be understood to truly understand what impact the bitter price might have.
What are Future Contracts "on Weather Forecast", simple explanation
Future contracts can be most simply explained by a real-world example. We will talk about the grain market, because it is the type of market that is most needed to make these future contracts. In agriculture, future contracts offer stability and help farmers protect themselves from massive losses:
We have on the part of the contract a farmer (a wheat cultivator) and a bread maker. The wheat price at the time of writing is $ 1000 per tonne. The food market may be relatively unpredictable. If the production of grain is increasing, then prices will fall. If we say floods in that year, grain production is decreasing and prices for each producer will increase.
Both participants are at the mercy of the weather forecast and work on an unpredictable market. I decide to sign a one-quarter contract in advance at the price of the day. In the following quarter, the farmer will send a ton of grain to the bread factory to the producer at $ 1,000, whether the year was a good one for production or not and independent of the market price. The farmer takes the risk that if the year is a bad one, then the price will increase and he will sell below the market price. The manufacturer takes the risk that if the year is good, then the price will fall and he will buy at an overpayment. Each participant assumes the possibility of losing. Each of them "bets" that the market will go against it and protect itself from the problems that may arise on the market in the future. The two make their so-called hedge.
At the end of the three months, the wheat price is $ 1,200. The farmer must send one tonne of grain to the producer at the price of $ 1,000 because he has "bet" that it will be the price. So the farmer is at a loss of 200 dollars.
The Future Market for Bitcoin
Now, let's get the whole grain out of the equation. Instead of producer, farmer and grain, we have more traders on a future bitcoin market. They do not even produce grain / bitcoin, nor do they need a ton of grain delivered at the factory to perform the contract (in our case, 100 bitcoins).
Bitcoin costs 10000 dollars at the market price. Trader A bets that the bitcoin price over a quarter increases (opens a long position). Trader B bets that the bitcoin price over a quarter will drop (open a short position). At the end of the quarter, the price is $ 12,000, trader A earned $ 2,000 (the difference), and trader B lost $ 2,000. A wins, B decides to keep short position to avoid losing. Trader C comes in, who opens a long position, so he bet the price will increase. Bitcoin price rises again to $ 14,000. C won 2000, B lost a total of 4000. Notice that B lost as much as they have won A and C in total.
So when someone wins, someone else loses that. Operators of the platform on which future contracts are traded earn from commissions paid by the three traders.
Important for future markets is that someone always be willing to counter, accept your bet, which we can guess it will happen.
It is important to note that the introduction of future contracts at CME and CBOE does not imply a higher consumption of bitcoin on the market. During this time, traders only work in US dollars and the two stock market operators and traders enrolled on the market will not buy, keep, and sell no bitcoin. So, pragmatically speaking, listing future contracts has no effect on production and the market, other than allowing traditional investors to enter a market connected to bitcoin and to observe the price movements more closely.
