What Experts Say About Bitcoin Futures Contracts

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If Google Trends is any indicator, interest in Bitcoin hit its tipping point right around November 25, when interest rose to a peak on November 29, and then reached an all-time high in search volume on December 7, 2017, the 76th anniversary of Pearl Harbor. On December 5, Bitcoin was trading at just under $12,000. By the 7th, it was trading at over $17,000 and on the 16th it was hovering around the $20,000 mark. If that’s not a wild enough ride for you, throw Bitcoin futures into the mix. While Bitcoin prices continued to rise after the debut of Bitcoin futures on the CBOE, they fell drastically after they started trading on the CME. Bitcoin futures have attracted institutional investors, and it may be time to forget everything we’ve learned about the ebb and flow of Bitcoin’s value, and hit the reset button. Again.

Bitcoin search volume, Source: Google Trends

When Bitcoin was first introduced on January 3, 2009, it was the world’s first known decentralized cryptocurrency, as an alternative to more traditional, centralized fiat currency. As its price increased, so did network fees, to where it’s more of a store of value than an easily exchanged digital currency. With the introduction of Bitcoin futures, crypto-traders will continue to conduct trades on the Bitcoin exchange market, while traditional investors may now bet on its future value on the general exchange market, instilling confidence in the value of Bitcoin into the hearts and minds of previous skeptics.

CBOE is First to Market in Bitcoin Futures Trading

Bitcoin futures were launched last Sunday by the Chicago-based exchange group, CBOE. On that first day, Bitcoin’s price on Gemini shot up from $15,000 to $18,700. While some insist that this is proof of a bubble, others see the rising price as evidence that it is crossing into the financial mainstream. According to Evelyn Cheng of CNBC, “Many see the launch of Bitcoin futures as a first step towards establishing digital currency as a legitimate asset class,” paving the way for a Bitcoin exchange-traded fund.

CBOE’s competitor, the CME (or, Chicago Mercantile Exchange,owned by the CME Group,) launched its own Bitcoin futures on December 18. Due to the inconsistency of Bitcoin’s pricing across the various exchanges, CME has designed their strategy in such a way that the prices of the Bitcoin will be calculated against several Bitcoin exchanges, including Bitstamp, GDAX, itBit and Kraken.

What Exactly are “Bitcoin Futures”?

Bitcoin Futures enable investors to bet on the coin’s future prices. Like all futures trading, a Bitcoin futures contract centers around users agreeing to buy or sell a specific amount of cryptocurrency once it reaches a predetermined price on a future date. In essence, the futures buyer is purchasing the right to sell Bitcoins at a specific price, regardless of the market conditions. These markets do not involve actual Bitcoin; they simply trade on the prices of Bitcoin and are settled in cash.

This is the first time ever that such financial products are on the market; the idea had never even been considered before. Bitcoin futures are brand new, and skeptics may consider them to be a risky investment. J.P. Morgan, Citigroup and other large banks have a wait-and-see attitude, and aren’t immediately offering clearing of Bitcoin futures. While J.P. Morgan is holding off on CBOE, they may have a more positive outlook on CMEt. Another major brokerage, TD Waterhouse, allowed qualified clients to begin trading Bitcoin futures on CBOE. To minimize risk, it is requiring a minimum $25,000 balance as an eligibility requirement for trading..

Why Are Bitcoin Futures So Exciting?

The development of Bitcoin futures heralds a new era for cryptocurrency:

1) Bitcoin futures can be traded on mainstream regulated exchanges. Investors who are reluctant to trade unregulated Bitcoin, may see futures as a more conservative way to cash in on this booming market.

2) Speculation is possible in locations where cryptocurrency is banned. Despite the ban on cryptocurrency in certain regions, investors may possibly trade Bitcoin futures.

3) Fund managers may be more likely to offer Bitcoin futures as investment options to clients. Bitcoin futures are traded on regulated exchanges, possibly making them appear more viable.

4) They Increase liquidity of the market. Futures make it easier to buy, sell and trade Bitcoin, by giving you access to more cash on hand.

5) Futures may decrease price volatility of Bitcoin.

Futures have a tendency to balance out price fluctuations, possibly making Bitcoin pricing less volatile altogether.

According to Karl Schamotta, Director of Global Product and Market Strategy, Cambridge Global Payments, Bitcoin futures are a “dangerous experiment.” He states, “CBOE and CME, both of the exchanges that are offering this product, have really provided sort of a veneer of legitimacy to this.”

Due to the minimum requirements set forth by the CBOE and the CME, most Bitcoin futures will attract institutional and accredited investors, as well as brokers manage large portfolios for wealthy clients. Schamotta believes that banks and trading house have a difficult choice. Their concern about client risk makes them leary of opening up trading to individual investors, but they don’t want to lose their clients to their competitors who may provide more investment options. Following the 80/20 rule, they may be hedging their own bet, by offering this product to their top clients to prevent attrition, while mitigating their risk with smaller investors. For example, Goldman Sachs Group Inc. and ABN Amro Group are clearing Bitcoin futures only for certain clients. Interactive Brokers Group Inc., a clearing firm and online brokerage, is allowing access to both the CME and CBOE, but requires a $100,000 minimum investment, creating a barrier to entry for non-institutional investors.

What do Bitcoin Futures mean for its investors and traders? How exactly will trading work? What’s going to happen to Bitcoin prices over the next two weeks? We posed these questions and aggregate the results in the content that follows. Some of the predictions were expected, while other answers were quite stunning. Keep reading.

Why the Next Two Weeks are Critical

While Bitcoin prices continued to rise after CBOE went live, they moved in the opposite direction after CME’s debut. This is an entirely new product, and its effect on Bitcoin prices for the long term is still an unknown. As the needle moves in either direction, experts may begin deciphering patterns in the results.

It could be that institutional investors will continue to see Bitcoin as a volatile market, and their bets on the futures market may have a direct impact on Bitcoin’s growth. Despite the negativity, some experts remain optimistic that Bitcoin prices will skyrocket to as much as $300,000 – $400,000 per coin.

How Bitcoin Futures Trading Works

CME Contracts have a number of rules that might be alien to novice Bitcoin traders who have never worked with other derivative instruments. Using the BTC ticker, each tick is valued at $5 per Bitcoin, with a spot position limit of 1,000 contracts. As each contract consists of five Bitcoin, this translates to $25 up or down per contract held at the slightest fluctuation in the price of Bitcoin. Trading times for Bitcoin futures on CME Globex and CME ClearPort will be from 5 p.m. to 4 p.m. CT, Sunday to Friday. These long hours are typical of electronically traded futures contracts. The spot position limit is 1000 contracts, designed to prevent one person or entity from manipulating the market.

To add stability, price limits on Bitcoin futures will be 20% above or below the prior settlement price, as determined by the Bitcoin Reference Rate, or a daily reference rate of the US Dollar price of one Bitcoin as of 4 p.m. GMT.

CBOE Contracts have a slightly different set of rules. Each contract consists of one Bitcoin instead of five, under the ticker, XBT. The minimum price interval will be $10 per single Bitcoin contract, instead of $25, and trading times will be from Monday to Friday from 8:30 a.m. to 3:15 p.m. The spot position limit is 5,000 contracts instead of the more conservative limit of 1,000 contracts with CME.

As with CME contracts, CBOE sets a price limit of 20% above or below the prior settlement price, based on the auction price for Bitcoin in U.S. dollars as of 4 p.m. ET on the final settlement date.

Will Bitcoin Futures Benefit the Bitcoin Market? Experts are Say…

Bank of America Meryll Lynch Report: Cryptocurrency is a “major new revenue pool” for US exchanges. The usual daily volume of fiat currencies traded on the global currency exchange Forex is about $5 trillion. But in this year alone, Bitcoin daily trading increased more than tenfold from$57 million to $628 million. Through still minuscule compared to Forex volume, you could interpret this report to suggest that the huge increase is indicative of much higher numbers in the future.

With individual investors experiencing FOMO (Fear of Missing Out), Coinbase is growing at a rate of 50,000 new wallets a day – 1.5 million per month – despite the tedious process of setting up on an online wallet, linking a bank account or credit card, and waiting for funds to clear. With futures, any qualified speculator can capitalize on the Bitcoin market just as easily as he could obtain fiat currency, without the need to buy into the actual cryptocurrency.

Former Market Regulator, Bart Chilton: Trading Bitcoin futures will be safe and could actually help stabilize the cryptocurrency. In an interview with CNBC, Chilton said, “CME is the most liquid, diverse traded futures contracts around the world. They know what they are doing on these markets.”

Andrew Busch, Chief Market Intelligence Officer at the CFTC: He assured the public that manipulation of future contracts will be controlled. How? The exchanges will look at the underlying cash contract to make sure that the futures contract is not manipulated.

Aswath Damodaran, Finance Professor at NYU’s Stern School of Business: Futures trading only makes sense from the perspective of playing with pricing. However, “it does absolutely nothing in advancing Bitcoin’s cause as a digital currency.” In other words, he sees it as a trading game that will not have a long-term effect on the mainstreaming of Bitcoin.

Ronnie Moas, Founder of Standpoint Research: CME futures contracts are “a stamp of approval” that will open the door for other trading platforms. This, in turn, will lead to more investment.

Terry Duffy, CME Group Chairman and Chief Executive Officer: He acknowledged investors fear of the risk, and reassured them that protective measures have been put in place. In his words: “Though we have worked through a lengthy, comprehensive process with the CFTC to get to this point, we recognize Bitcoin is a new, uncharted market that will continue to evolve, requiring continued collaboration with the Commission and our clients going forward.” He mentioned several risk management tools that would be utilized: an initial margin of 35 percent, position and intraday price limits, and several other risk and credit controls.

Spencer Bogart, a partner at Blockchain Capital LLC: Mr. Bogart believes that though investment is currently slow, with time, it will definitely increase. “This is a brand-new asset class and I think perhaps a lot of investors want to sit back and see how this plays out before dipping their toes in this market.”

Neil Wilson, Senior Market Analyst at ETX Capital: The mainstreaming of Bitcoin through futures trading will make it less valuable, not more. Why? Because the appeal of cryptos as an off-grid currency could be reduced as more regulations kick in and many experts see regulation as an inevitable consequence of entering the exchanges.

Brett Manning, Senior Market Analyst at Breifing.com: He believes that the futures market will accomplish something very important – allowing bigger institutional capital to flow into Bitcoin, because they will finally be able to hedge.

Richard Levin, Chair of Polsinelli: He believes the exchange connection will be good for digital assets, and he expressed confidence in the abilities of the exchanges to manage risks. Levin pointed out their highly sophisticated risk management mechanisms. “Even in the depths of the last financial crisis, the clearinghouses and the exchanges functioned in a highly efficient manner.”

What Comes Next?

Everything is still up in the air in these initial days of Bitcoin futures trading. Though futures trading will certainly be volatile in the initial days, strategic management may cause it to stabilize the market.

Bitcoin-hater and JPMorgan Chase CEO Jamie Dimon: Even Dimon admitted that the cryptocurrency could hit $100,000 before “collapsing,” though this admission did nothing to stop Swedish firm Blockswater from filing a formal “market abuse report” with European regulators after Dimon’s assessment of Bitcoin as a fraud. The company alleges that Dimon knew his statements were inaccurate and was intentionally trying to influence the Bitcoin markets with his remarks.

If you meet the strict requirements, and plan to invest in Bitcoin futures, then do a thorough investigation into the details of futures contracts. The sources we compiled should get you started on your journey into this exciting new opportunity.

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