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Bitcoin Futures: Everything You Need To Know

Bitcoin in a hand
Now offering Bitcoin futures

Bitcoin futures will begin trading for the first time ever in a few hours, at 17:00 CST on the Cboe. Like everything about Bitcoin and cryptocurrencies, this Bitcoin futures launch is fraught with controversy and heated debate.

Many cryptocurrency enthusiasts are convinced that this will mark the birth of Bitcoin as a mainstream financial product as it opens the doors for institutions and professional traders to enter the cryptocurrency markets, and make them legitimate in the eyes of the general public. On the other side of the fence are the critics, many of whom are in the traditional financial industry, who say that it is too soon to offer derivative financial products based on Bitcoin, and that the new Bitcoin futures are opening the futures markets to a huge systemic risk due to the extreme volatility of the cryptocurrency markets.

Below are things that investors need to know before Bitcoin futures launch.

Bitcoin Futures Basics

The Cboe is launching its Bitcoin futures contract with the trading symbol XBT at 17:00 CST time on Sunday December 10, 2017. Rival exchange CME is also planning on launching a Bitcoin futures contract the following week on December 18, 2017.

Futures will allow speculators to place leveraged bets on the future price of Bitcoin at a specified time, or expiration. Those who believe price will rise can go long, while those who believe price will fall can go short. With futures the long and short bets are evenly matched, meaning for every long position there is an opposite short position.

The new Bitcoin futures will be cash settled, meaning that no Bitcoins will actually change hands when the futures contract expires. In essence the winning traders will collect their profits from the losing traders. As is true for most futures contracts, traders will almost certainly close their positions and accept their losses or collect their wins, before the contract reaches its expiration.

Shorting Bitcoin

The ability to make a short bet on Bitcoin without having to borrow from a broker has strong appeal for traders. The Cboe and CME have said that by offering futures it will help stabilize prices for Bitcoin, thus taming the extreme volatility of the asset. Bitcoin bears are also quite happy to have the ability to short using futures, as they have been frustrated to this point by the difficulties that have been inherent in shorting Bitcoin.

It’s possible that in the short-term the ability to easily short Bitcoin prices will put pressure on the cash market, causing a drop in the price of Bitcoin. Longer term however, it is expected that the ability to short Bitcoin will improve true price discovery for the asset. The ability to take both the long and short side with Bitcoin will also serve to increase the interest of hedge funds in cryptocurrencies, which should broaden acceptance of the digital currencies in general.

Hedging with Bitcoin

There are expectations that the Bitcoin mining community will embrace Bitcoin futures, as it will allow them to hedge against the potential for a sharp drop in the price of Bitcoin, in effect locking in their mining prices. The miners are some of the largest players in the Bitcoin ecosystem, and could bring large amounts of capital to the futures markets

Some professional traders have also been waiting excitedly for the ability to unleash quantitative trading strategies that depend on the ability to short Bitcoin. This won’t happen overnight however, as their systems will take some time to build because of the need for price history. They will also need to wait for the ability to place block trades, which won’t become a possibility until December 17 on the Cboe contracts.

Are Bitcoin Futures Premature?

We can’t ignore the warnings of major investment banks and brokers, who have said that Bitcoin futures at this time are premature, and pose systemic risks. These concerns include those mentioned in an open letter to the CFTC in which banks and brokers claim the exchanges haven’t collected enough feedback on margin requirements.

Bitcoin futures “did not allow for proper public transparency and input.”
— Futures Industry Association

Because of this most big banks, including Citigroup and JPMorgan, will not offer the Bitcoin futures to their clients. Goldman Sachs has said they will offer the Bitcoin futures contracts, but only to certain clients. For brokers, Fidelity has already said it will not offer Bitcoin futures. TD Ameritrade is planning on offering Bitcoin futures immediately after they are launched, and other large brokers, including Charles Schwab and E-Trade have declined to comment.

Addressing the Margin Concerns

Margin is the amount of money a trader needs to offer as collateral when opening a futures position. Many heavily traded futures contracts require as little as 10% of the value of the underlying contract as margin. The Cboe has said it will require 44% margin, while the CME is requiring 35% margin on Bitcoin futures.

In the case of the Cboe, this means a Bitcoin contract trading at $15,000 would require $6,600 in margin collateral, while for the CME the margin requirement on the same contract would be $4,250. There would also be requirements for additional margin if the margin account falls below a certain level.

Both the Cboe and CME feel that these large margin requirements will avoid any potential systemic risks in the event of extreme volatility in the Bitcoin cash market, such as the 40% surge high seen over two days just last week.

Price Limit Circuit Breakers

As with other futures contracts and financial markets, there will be circuit breakers put in place in the event of rapid price moves with Bitcoin. In the case of the Cboe contract, trading will be halted for 2 minutes if best bid in the contract closest to expiration moves 10% above or below the previous day’s close. If, after trade resumes, the contract moves 20% or more above or below the previous day’s settlement, trade will be halted for five minutes.

A Slow Start

Institutional investors and professional traders will likely exercise some caution and enter the Bitcoin futures market slowly, testing the waters and gathering data before fully committing themselves. This could help stabilize prices as Bitcoin futures slowly gain momentum.
One concern however is that retail investors, who don’t need to expose themselves to the risks of leveraged futures trading, will jump in the market in order to magnify there already substantial Bitcoin gains. Without fully understanding the futures market, and in a mindset of extreme euphoria, they could be putting themselves at a huge financial risk.


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