As the cryptoasset market continues to grow and spread at unparalleled rates, we can observe interesting evolutions in the market just within the past few months! An important development was observed in December 2017 — the official launch of Bitcoin Futures. The news of Bitcoin venturing into the world of sophisticated financial derivatives had pushed the price of the currency to record highs to above $16,000 per unit of Bitcoin. The general sentiment around Bitcoin’s new adventure, in social media and among the aficionados of the crypto-market was that futures trading would somehow immediately cause a Bitcoin crash. While many agreed to it, a vast segment of cryptoasset-traders had strong reasons to disagree.
Bitcoin’s new venture into the mainstream, as quoted by Bloomberg has already had an impact on the cryptoassets, and this is just the beginning.
Explaining futures trading and Bitcoin futures
Futures are nothing but a financial derivative. The term financial derivatives is used to refer to contracts whose value depends on the performance of an underlying asset. Futures contracts involve agreements that are made to buy or sell an asset at a predetermined price at some point in the future — thus the term “futures”. This enables investors to lock in a price for the asset, either for security purposes or for speculation.
Since the futures markets allow traders and investors to take a risk by selling commodities and futures contracts at a later date and set-price, the traders will need to speculate about where bitcoin’s price will be in the future and ultimately bet on its unknown price volatility. The traders’ profit or loss on the contract depends on the inherent price fluctuations that will happen after the trade. In the case of a digital commodity like the Bitcoin, the futures market gives traders a chance to bet on whether bitcoin’s price will rise or fall — without actually owning the token.
One of the key requirements of futures contracts is that they must be traded on standardised exchanges like the CBOE or CME. The arrival of Bitcoin futures at an established and well-regulated derivative exchange will encourage more investors to trade in digital currency, giving Bitcoin a place among mainstream finance. This move is thus being considered to be a step in legitimising the cryptoasset by many. Household names like Goldman Sachs have reportedly said they plan to clear Bitcoin futures on behalf of some of their clients.
Current trading situation of Bitcoin Futures
The CBOE lists three bitcoin futures, each expiring in January, February, and March respectively. The final settlement value of the contracts will be determined by the price of bitcoin on the exchange Gemini. Each contract covers one bitcoin.
The margin rates on Bitcoin futures, or the amount a trader has to set aside as collateral for potential losses, is much higher than typical futures contracts. The CBOE quotes a margin rate of 44%, likely due to how volatile bitcoin can be. Additionally, the contracts are cash settled, implying that the investors will receive their final payment in cash instead of bitcoin. That also means that the CBOE doesn’t have to set up its own bitcoin wallet.
Impact of Bitcoin Futures on the cryptoasset world
The advent of bitcoin futures is supposed to bring a positive sentiment around the instability of the cryptoasset. Alistair Milne, chief investment officer and co-founder of Altana Digital Currency Fund said, ”Derivatives should have the effect of bringing a deeper liquidity to the market which should reduce volatility,” He added, “As the whole cryptoasset economy gets bigger the volatility should reduce.”
The new venture of bitcoin in the futures market has already had an upward effect on the bitcoin price. With names like CBOE, CME, Cantor Fitzgerald and other well-worn Wall Street firms wanting to get in on the game, bitcoin believers are more convinced than ever that the cryptoasset is here to stay. On the other end of the spectrum, the fear of missing out has also induced new faces to enter the arena. The bitcoin exchange Coinbase saw about 300,000 more users between Nov. 22 to Nov. 26, last year, according to Bloomberg.
The increasing demand for bitcoin futures and the general optimism that seems prevalent in the sector could also push up bitcoin prices further, as this would serve as a sign that some more established investors may be growing bullish about the crypto-coin.
Bitcoin has evolved to cater to a larger set of idiosyncrasies. This step is yet another attempt to not only popularize the cryptoasset but also get people to consider other crypto-coins as a legit form of investment.