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.
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.
Want to read the rest of this newsletter?
Log in below or register for a membership.