Bitcoin- the most valuable crypto on the market- has made its debut on the futures market. As the first day of derivatives trading draws to a close, expert predictions that a wave of selling would result from the debut appear to be highly inaccurate.
During the Sunday launch Bitcoin prices went red hot, which forced the CBOE to impose temporary halts in order to stabilize the frantic market. The value of Bitcoin, the underlying asset, surged as much as 26%. The Chicago mercantile exchange has set a date of December 28th to launch their own Bitcoin futures.
What Are Futures?
Futures are essentially an agreement to purchase and sell a specific security or product at a certain time. With regards to Bitcoin, futures are a method that wary investors that are concerned about unregulated exchanges use to speculate on the potential future value of Bitcoin at a date in the future. This speculation occurs in an environment that is overseen by the Commodities Futures and Trades Commission in an established, trustworthy exchange.
Futures have a number of applications outside of pure speculation- they can also be used to manage and minimize risk in a diversified portfolio, especially when the underlying asset has a highly volatile price, as is the case with Bitcoin.
Oil, for example, is only now beginning to recover from a dramatic fall to less than $30 USD per barrel in 2016. Currently, Oil trades at around $60 per barrel. Understandably, oil is a major expense for fuel hungry organizations such as airlines, so it makes sense that these organizations would want to lock in favorable prices for future months via the securities market.
As the futures market is speculative, however, this doesn’t always place market participants in the best position. Delta Airlines, for example, took a massive $2.3 billion dollar loss in 2015 due to the price of oil sliding more than expected in that year.
On Monday afternoon, the price of Bitcoin hovered around $16,600. Many Bitcoin investors anticipate a price drop in the near future- in order to protect themselves from loss, these investors conduct the selling, or shorting, of Bitcoin futures.
For example, a Bitcoin trader may want to sell a January futures contract that now has a price of around $17,800, and will repurchase the contract at a date closer to when the contract is due to settle at a price of around $16,000. In most cases, the price of an asset and its future contract converge at the time of delivery. By doing this, the trader generates around $1,800 profit on the futures speculation, despite the fact that Bitcoin has actually fallen in value by around $600.
How Are Bitcoin Futures Being Traded?
At this point in time, the CBOE currently lists three different Bitcoin futures, which expire in January, February, and March respectively. The final settlement value of these contracts is determined by the market price of Bitcoin on the Gemini exchange. Bitcoin currently trades on Gemini for around $16,600 at the time of this report. Each futures contract covers one Bitcoin.
Bitcoin futures also have far higher margin rates than average futures contracts, which means traders must set aside additional collateral for potential losses. Due to the high volatility levels of Bitcoin, the CBOE has set a margin rate of 44%. For January contracts, for example, around $7,832 in collateral must be set aside.
In an interesting move, Bitcoin future contracts are settled in fiat currency, which is likely to eliminate the headache of setting up a Bitcoin wallet for the CBOE. The symbol for Bitcoin futures used by CBOE is “XBT”.
How Will Bitcoin Futures Affect the Price of Bitcoin?
The launch of Bitcoin futures has already had a positive effect on the price of Bitcoin. Many well-known Wall Street players such as CME, Cantor Fitzgerald, and the CBOE have stated that they plan to enter the Bitcoin futures fray, which has cemented the fact that Bitcoin is indeed here to stay.
The FOMO effect is currently in full swing, with popular exchange platforms seeing more than 300,000 new users registering between November 22nd to November 26th. Increased demand for Bitcoin inevitably pushes Bitcoin prices higher.
Ultimately, it’s difficult to determine how futures will affect the price of Bitcoin. Given the massive amount of demand for Bitcoin futures in the last few days, however, it’s appearing clear that “bubble” predictions from major financial powerhouses such as J.P. Morgan are proving to be far from the mark.