How Bitcoin Futures can help Bitcoin investors

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The planned launch in the next 10 days of Bitcoin futures by the Chicago exchanges CME Group was one-upped when CBOE Global Markets announced it would be launching its own Bitcoin futures trading on Sunday.

The Nasdaq is also planning to introduce futures trading in the first half of 2018, with the Commodity Futures Trading Commission having approved Bitcoin futures last week.

Regardless the argument for Bitcoin futures, it is good to see the two leading market players in the U.S. starting to offer properly structured products to the market. It shows clearly the demand coming from the market itself. It will also help to attract both institutional investors and more sophisticated investors to the market.

So what is futures and why does it matter? What does it means to the market players?

“Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.” (Investopedia)

As laid out in an excellent piece by Simon Constable over on Forbes, Bitcoin futures will open up six clear opportunities:

  • Futures exchanges run by markets experts.
  • Big financial firms understand futures.
  • Reference price.
  • Futures contracts don’t go missing.
  • You can easily bet on a decline in prices.
  • It’s regulated.

In addition to being able to short bitcoin, there’s considerable speculation about whether futures will lower or increase the volatility level of bitcoin, according to CNBC.

Citing information from CME Group, Bob Pisani clarified further on the benefits of Bitcoin futures:

Price limits [will] kick in during gains or losses of 7 per cent, 13 per cent and 20 percent that would slow and in some cases halt trading.

In particular, prices will not be allowed to move up or down more than 20 per cent from the prior day’s close.

If that limit is hit, trading can only continue at or within the +/- 20 per cent limit for the remainder of the trading session.

CBOE products don’t have daily limits, but will offer a system to make the volatility manageable as in normal stock markets. It will be interesting to see how different market players are competing with their own products. (Recently Leonteq launched ETN in SIX as well.)

On Wednesday, the price of bitcoin climbed to a fresh record high of more than US$14,000, and it is about to break the record again.

Let’s see how these products help the market to become more mature and grow even further. I’m looking forward to see more institutional-level crypto products and I’m happy to participate in building an ecosystem for cryptoeconomics.

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