On Sunday (December 10) the largest US options exchange group Chicago Board Options Exchange (CBOE) launched trading of Bitcoin futures. Next Sunday, December 17, the world’s leading derivatives exchange, CME Group, also starts Bitcoin futures trading. Will it decrease volatility and “tame” Bitcoin, as the CME Group chairman Leo Melamed has proclaimed, or will it just give big firms from the Wall Street space for manipulations?
Bitcoin futures, ladies and gentlemen!
No one remained indifferent to the news about launching Bitcoin futures — some claim that it is the beginning of the new era, others say that they will only increase volatility. Futures contracts are powerful investment tools with over 400 years old history, that have been successfully used in traditional finance markets, but no one knows for sure how they will affect crypto. After the announcement about launching futures (October 31) Bitcoin price rose to $7 000 and started its rollercoaster ride, breaking its own historical maximum almost every day and reaching $19 000 on some exchanges. Tireless skeptics shouted “Bubble!” every time price went down, but despite the fluctuations Bitcoin aspired up.
For many people term “Bitcoin futures” may be incomprehensible and at the same time intriguing. Simply put, futures contract is an agreement of sale (it may be any commodity or financial instrument) on specific date for specific price. Price may grow or fall — it doesn’t matter, as you have contract with set numbers. For example, you have agreement with someone, that on Tuesday you will give him or her $20, and your partner will sell you black kitten — that is future contract. Even if black kittens will become extremely popular next week, and their price will hit $1 000 (you never know, market of black kittens is extremely volatile) — even then, you will still pay $20, as mentioned in the contract. But if suddenly white kittens become leaders on the market, and black kittens’ price falls to $5 — you still pay $20. Future contracts are used by manufacturers and consumers to protect themselves against possible losses from the price changes — or by traders who intend to speculate.
Futures are supposed to strengthen position of Bitcoin and make it less volatile in the long run, although now we can see leaps in price because new participants and investors came to the market. Influx of people was so massive, that CBOE’s website crashed due to the overloading after few minutes of trading Bitcoin futures.
Hidden Pitfalls
“It is rare that you see something more volatile than Bitcoin, but we found it: Bitcoin futures,” — Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.
- While most financial experts and cryptocurrency enthusiasts are excited about trading Bitcoin futures, some predict that futures are not good for crypto market in the long run. Many crypto enthusiasts wait for inflow of money from new investors as a result of future trading. But the point is money will not pour to the cryptocurrency market — investors will buy derivatives that don’t impact Bitcoin directly. Futures contracts don’t require from the seller the ownership of the real Bitcoins. Instead of buying Bitcoin traders may decide to buy futures. Many investors want to profit from Bitcoin price without actually buying any Bitcoin — so they prefer dollar-settled Bitcoin contract rather than actual bitcoins.
- In many futures contracts instead of physical delivery of sale the buyer receives the difference between the futures price and the current market price. That’s why sometimes there are more futures contracts than actual commodity. Bitcoin futures are set in dollars, so derivative product provide investors with better liquidity comparing to Bitcoin.
- A lot of capital and investors comes to the market with the futures, but they also give more space for speculations. Large players can use bitcoin futures to manipulate the market.
But, despite the above-mentioned issues connected with launching of Bitcoin futures, it is huge and significant step for the cryptocurrencies, because …
Bitcoin Futures are Extremely Important
- Exchanges offer what people want to trade. Trading Bitcoin futures is the sign of mainstream adoption of cryptocurrency. Bitcoin futures will speed up the legitimation of Bitcoin as an asset and currency.
- Futures trading helps to stabilise the market in the long term and increase scale of trading. While more and more people become interested in Bitcoin, its market is still comparatively narrow. With the attention of serious investors and traders cryptocurrency market may improve to completely new level.
- Many crypto evangelists are experts in Bitcoin and blockchain, but they are not professionals in traditional finance markets. Trading on such large and authoritative exchanges as CBOE and CME (and more in the future) can bring the cryptocurrency to the completely new level — so the further growth of Bitcoin price and liquidity may be expected. Also Bitcoin becomes more regulated — even though most crypto evangelists hate the word “regulated”, regulation of Bitcoin is an important step on the way to its legitimation, and doesn’t make cryptocurrency dependant or centralized.
- Bitcoin futures provide better order execution — comparing to buying real Bitcoin, you don’t have to wait transaction confirmation, worry about hacking threat or any other problems that may occur and prevent from receiving coins. Futures contract guarantee the fulfillment of all agreements.
- CBOE and CME are regulated exchanges, that guarantee the safety of clients’ funds and contract compliance. Serious investors, who don’t trust Bitcoin exchanges, trust such reliable trading platforms, so there is inflow of new people in crypto market — and it is an important step toward global acceptance of cryptocurrency.
Looking back, we can see that the way that Bitcoin has passed is incredible — from subject of interest only for limited number of cypherpunks fascinated by the idea of decentralized and encrypted currency to the recognized in more and more countries as legal method of payment and traded on exchanges asset. And there is even more ahead. In the long run, trading Bitcoin futures is a significant shift toward legitimation of Bitcoin and cryptocurrencies at all, that also helps to lower high volatility of Bitcoin and make it more stable and usable as asset or currency. You can easily store your Bitcoins in Bonpay wallet and spend them with Bonpay prepaid card.