If you own Bitcoin, and especially if you’re an active Bitcoin trader you should have two dates marked in red on your calendar and plan to be glued to your computer. Those dates are December 10, 2017 and December 18, 2017. These dates could well be cited in history decades from now as the true beginning of the mainstream adoption of Bitcoin and other cryptocurrencies, and a turning point in the way business is transacted and value transferred globally.
Why are these dates important? Because December 10th is when the Cboe will release its Bitcoin futures derivative into the wild, and December 18th will see the CME release its own Bitcoin futures product. These two futures contracts are almost certain to change the landscape for the Bitcoin market, and eventually all cryptocurrencies, irreversibly.
You see, currently Bitcoin is only available in the cash market right now. This means that people only have an incentive to buy Bitcoin. No one in the market wants the price of Bitcoin to fall (unless it’s to buy more on the dip). Everyone is incentivized to keep the price of Bitcoin increasing.
But that’s all about to change, because the futures market is far different from the cash market. Rather than a happy place full of optimists looking for continually higher prices and profits, the futures market is full of pessimists looking to protect themselves from adverse market moves. They are still concerned with profits, but don’t care whether those profits come from rising prices or falling prices. Because when you’re dealing with derivatives like futures, immense wealth can be created from a falling market just as easily as in a rising market. In fact, assets tend to fall far more quickly than they rise, so it is often more profitable to bet on falling prices in the futures markets.
Understanding the Impact of Bitcoin Futures Trading
As you scroll through Bitcoin forums, sub-Reddits, Steem, Slack, Discord or your other favorite meeting place online you’ll see mostly optimism over the upcoming addition of Bitcoin futures to the cryptocurrency ecosystem. Everyone is gushing over how Bitcoin futures will cause the price of Bitcoin to rise.
The problem with this is that it’s based on false assumptions and a lack of understanding about how the futures markets work, and how they are fundamentally different from the cash markets.
In fact, you could say that the cash and futures markets are complete opposites in some ways.
For instance, as I mentioned above, the cash markets are basically filled with optimists who feel that price has nowhere to go but up. Futures markets, on the other hand, are primarily full of pessimists who are worried that price will move against them in one direction or the other. The futures markets were created to allow these types of investors to hedge against market risks.
The downside in the Bitcoin cash market has been protected thus far because there is no way to “sell” in a cash market if you don’t already own Bitcoins. Even those platforms that allow short selling have to loan the Bitcoins to short sellers, which means they had to buy it at some point, thus supporting higher prices.
In the futures market there is no such requirement. Selling Bitcoin will be possible whether or not the seller actually owns any Bitcoins. For example, crude oil producers will sell futures contracts when they are worried that the price of crude oil will fall in the future so they can lock in higher prices. Airlines might buy crude oil futures now to lock in a lower price when they are worried the price of oil will rise in the future. In both cases, buyers and sellers are pessimistic about the future and are using futures contracts to hedge against risks.
In the case of a physical commodity such as crude oil, the producers and airlines are natural hedgers who take opposite sides of the market. This keeps prices balanced and creates equilibrium for the most part.
The futures markets gain extra liquidity from market makers and speculators, but the bulk of the transactions come from the natural hedging companies and organizations.
When Bitcoin futures launch the only natural hedgers will be those who own Bitcoin, and those who mine Bitcoin. Bitcoin owners will sell futures to lock in their gains. Bitcoin miners will sell futures contracts to guarantee they are getting a minimum price for Bitcoins they mine in the future. There are no natural buyers of futures contracts on Bitcoins, and this will create an imbalance in the futures market putting increasing pressure on the downside.
Now we come to the group of speculators. They could provide stability and keep price steady. But this group won’t be comprised of just buyers or just sellers. It will have both bulls and bears, those who want the price of Bitcoin to rise, and those who want the price of Bitcoin to fall. We’ve already seen the power of the bulls in the cash market – it’s what has driven the price of Bitcoin up nearly 2,000% in 2017. What is unknown is the power of the bears.
Is it possible that the bears are stronger than the bulls? Or will the bulls retain control of the market. No one knows for sure, but many on Wall Street are speculating that the bears have just been waiting for their chance to push Bitcoin prices lower.
It is often said that asset prices increase as if walking up the stairs, but take the elevator when going lower. This means price declines move faster than price increases. This is hard to believe with Bitcoin, considering the nearly parabolic price rise in the past week, but if it’s true it means we could see Bitcoin’s price dropping by $10,000 or more in a single day.
Bitcoin Futures Contract Specification
Bitcoin futures will begin trading on the Cboe on Sunday December 10, 2017 at 17:00 CST. The Sunday start is meant to align with the start of trading Monday morning in Asia, which provides another twist as Japanese exchanges currently have a majority when it comes to Bitcoin trading volume.
Each contract will be cash-settled and will be based on 1 Bitcoin. The futures symbol used will be XBT.
Contract expirations have not been released yet, but the contract specifications state “The Exchange may list for trading up to four near-term expiration weeks (“weekly” contracts), three near-term serial months (“serial” contracts), and three months on the March quarterly cycle (“quarterly” contracts).”
The full Bitcoin contract specifications can be seen on the Cboe website.
It’s interesting to note that market orders for Bitcoin futures will not be permitted. Several protective measures have been put in place as well:
– Block orders will not be permitted until Sunday, December 17, 2017 at 5:00 p.m. CST
– Position Limits: A person: (i) may not own or control more than 5,000 contracts net long or net short in all XBT futures contract expirations combined and (ii) may not own or control more than 1,000 contracts net long or net short in the expiring XBT futures contract
– A 10% rise or fall in price from the prior closing price will cause a 2 minute trading halt. A 20% rise or fall in price from the prior closing price will cause a 5 minute trading halt.
Bitcoin prices will be based on quotes from the Gemini Exchange of the BTC/USD.
It has been announced by TD Ameritrade and Ally Financial that they will offer the new Bitcoin futures contracts for trading by their clients immediately. Goldman Sachs has also stated it will clear Bitcoin futures contracts for some clients. JPMorgan and Citibank have both said they will not be clearing Bitcoin futures contracts immediately, and haven’t given a timeframe for beginning to clear the contracts. Fidelity Investments has also stated it will not offer Bitcoin futures to its clients.