Bitcoin futures - new perspectives

In December 2017, the cryptocurrency market witnessed a landmark event: the U.S. exchanges SVOE and SME bitcoin futures.

So what are bitcoin futures and what impact will they have on the cryptocurrency rate?

What are bitcoin futures?

As you know, a futures contract is an obligation to buy or sell an asset at a specified time at a specified price, which is determined at the time the obligation is entered into. Thus, an entity that has entered into a futures contract is obligated to buy or sell an asset at the price specified in the contract at a specified time, no matter what the price of the asset is at that time.

The price quoted in futures is not taken from the ceiling. It is the expected value of the asset after a certain period of time. And the shorter the time frame, the more the futures price approaches the current price of the asset. Bitcoin futures are usually traders' instruments. The trader makes a profit according to the "buy cheaper, sell dearer" scheme.

In theory, it looks something like this: a trader bought a bitcoin futures for one month for $15,000. The trader's forecasts came true, one month later the price rose to $18,000. As a result, according to the contract, the seller sells bitcoin to the trader for $15,000, and the trader resells it for $18,000, receiving $3,000 of net profit.

In practice, it is rare to buy currencies. As a rule, traders make offset transactions - a transaction, the meaning of which is the resale of the futures itself. That is, the trader who bought the futures simply sells it to another person, making a profit on it.

In this case, the trader buys a bitcoin futures for 1 month for $15,000. Everything goes according to the forecast - the price rises, respectively, the futures price approaches it. At some point, the bitcoin futures price reaches, for example, $18 thousand. The trader simply sells that contract and receives the same $3,000 profit. If the forecasts were not met and the rate fell to $13,000 - then, be kind, get 2 thousand losses.

Bitcoin futures trading

Trading consists of three stages:

Stage 1: Entering the Market

At this stage, the trader predicts the bitcoin price. That is, buying a futures on the cryptocurrency, it is as if he is offering his prediction of its value.

Stage #2. Waiting for the right moment

• If the forecast is justified, then the trader is waiting for the right moment when the value of bitcoin futures will reach a profitable point for the trader.
• If the forecast does not come true and the rate falls instead of growing, then the trader waits for the right moment to exit the market with a minimal loss.

Step #3. Closing the position

This is the final stage. At the appropriate moment, the trader resells the futures, making a loss or profit.

Bitcoin futures on CME and CBOE

Bitcoin futures are traded on two exchanges: the Chicago Board Options Exchange and the Chicago Mercantile Exchange. These exchanges mediate between buyer and seller.

After the futures contract is concluded, the interaction between the seller and the buyer ends. Further, both one and the other are in contact only with the exchange, or rather, with the clearing house. This makes it possible to conduct offset transactions, where the buyer can resell the futures without informing the seller.

Amount of deposit and commission

When buying bitcoin futures, the trader does not spend any money on it, excluding the exchange commission. However, it does require a collateral or security deposit, the amount of which depends on bitcoin prices.

The standard deposit on all exchanges is from 4 to 10%However, due to the high volatility of bitcoin, the size of the security deposit in futures trading can be up to 30%. The amount of collateral is not constant and changes with strong price fluctuations and as the maturity date of the futures contract approaches.

When starting to trade bitcoin futures, a trader must be prepared for the exchange's requirements regarding the amount of collateral. Since the rate of cryptocurrency is practically unpredictable, theoretically, the deposit amount can reach 100%.

However, don't think that exchanges are trying to make money on this. The amount of the pledge will never exceed the amount determined by the financial risks. The fact is that the smaller the amount of the pledge, the more traders come to the exchange, the number of transactions grows, commissions from which are the profit of the exchange.

Bidding may be stopped

Despite the fact that exchange trading is speculative in nature, exchanges set a certain deviation limit for the bitcoin futures price to limit speculation. The previous day's price is used as the basis. A number of points are added to it and it forms the price range for the current day. If the price falls outside that range, Bitcoin futures trading is frozen, usually until the end of the day.

Formation of bitcoin futures price

Please note that bitcoin futures prices on the SVOE and CME exchanges may be different. This is due to the methodology of their calculation:

• On the CME exchange, the price is formed by the results of trading on the cryptocurrency exchanges Bitstamp, Kraken, GDAX and itBit;
• The SVOE exchange only generates prices based on data from Gemini cryptocurrency exchange.

Profit or risk hedging

If a trader is experienced in trading on the exchange and believes he or she can make a correct prediction about the price of bitcoin, then buying futures is justified for him or her. This is done for two purposes:

• making a profit from trading on the exchange;
• risk hedging.

If everything is clear about making profit, then it is necessary to say a few words about hedging. Hedging is a certain insurance against risks.

For example, you have 10 bitcoins and are looking for a house to buy, for which you plan to exchange the cryptocurrency for dollars before the purchase. Hoping that the price will rise by the time of purchase, you, as a reasonable person, fear that it may fall.

To insure yourself against risks, you buy a bitcoin futures for 10 BTC for the term you want. When it expires, you sell your bitcoins at the price specified in the contract and are guaranteed to receive your settlement amount, regardless of whether the rate goes up or down.

You were not concerned with making speculative profits, but with preserving the amount available. This is what hedging is all about.

Anyone can buy bitcoin futures, but it is worth noting that the buyer needs to have about 50%, or better all 100% of the contract price to make a deposit on the exchange, as well as in case of a loss.

Benefits of bitcoin futures

• Bitcoin futures trading does not require a large starting capital. To buy a contract, you need an amount that is much smaller than if you buy the cryptocurrency directly, and the amount of profit corresponds to trading real bitcoins. Buying one bitcoin for $15,000 and selling it for $20,000 will give you $5,000 profit. Buying futures at $15,000 and selling them for $20,000 will give you the same $5,000 profit, but you won't need to spend the real $15,000 to buy them.
• Bitcoin futures are highly liquid. Only two exchanges offer trading in these contracts so far, so all sellers and buyers are concentrated on them, thus forming a wide supply.
• CME and SVOE are official exchanges and are in the field of U.S. financial regulators. This is a 100% guarantee of futures execution.

Bitcoin futures risks

The main risk is the possibility of making a tangible loss. If your bitcoin price prediction turned out to be wrong, your money will go to the trader who made the correct forecast. Given the unpredictability of cryptocurrency value fluctuations and their magnitude, losses can be quite serious.

For example, a trader can get into the well-known for all trading on the foreign exchange market swing. Let's say you bought a futures, expecting a price increase. Within a day, the price of bitcoin has fallen by $3,000. Fearing further decline, you sell your security for a rise, receive a loss of $3,000, and buy futures for a fall. After that, the price of bitcoin soars by 4 thousand and reaches the previously forecasted value. After you sell this futures, your pocket will be lighter by another $4,000.

How the emergence of bitcoin futures affects the bitcoin price

The emergence of bitcoin futures is generally viewed positively by many analysts for a number of reasons:

• Their appearance makes bitcoin more popular. The more popular it is, the greater the demand and, consequently, the higher the price.
• The emergence of bitcoin futures is regarded as the official recognition of this cryptocurrency, and futures trading in the field of U.S. financial regulators make bitcoin a popular tool for investment.
• The U.S. financial markets are the most regulated of all global markets. Accordingly, the increased demand for bitcoin futures will drive up their value, which will also cause the bitcoin exchange rate to rise.

However, along with the positive factors, there are also a number of negative factors:

• Because of the high volatility of the bitcoin price, many traders buy futures and sell them immediately, making quick profits. The high volume of short trades naturally puts pressure on the bitcoin price.
• Along with the growth in demand, because of the influx of investors and traders, the supply also increases. It comes to the fact that at some moments, supply even exceeds demand, which causes the rate to fall.
• With significant financial reserves, big players are able to manipulate the market with the help of futures. For example, a major player places a large number of bitcoin futures to go down. When smaller investors see that, they understand that the big players will not just bet on going down, and they rush to sell their bitcoins while the "price is still good". As a result, the rate seriously falls, which was the goal of the big player. After that, he buys bitcoins at a price that he lowered for himself.

Bitcoin futures features for traders and investors

If the price drops drastically...

It is quite possible that the price of bitcoin will start to fall sharply. Don't panic. If this is the manipulation of the big players, their own purchases at a lower price will lead to a rapid rise in the price of bitcoin in a time frame roughly corresponding to the timing of the first futures.

If a large number of short positions on the exchange led to the fall in the rate, the price is more likely to recover due to the peculiarities of the cryptocurrency and the increasing number of people interested in it, but it will take much longer.

However, if bitcoin price crashes periodically, it will have a negative impact on investor sentiment, some of which will probably leave this market, making it difficult for the value to recover.

Investment attractiveness

You also need to understand that both bitcoin and its futures have a number of good prospects.

As we said before, trading contracts is directly regulated by the Commodity Futures Trading Commission (CFTC). This will reduce the number of fraudulent schemes, which will have a positive effect on bitcoin's credibility.

If bitcoin futures prove attractive as a financial instrument, bitcoin ETFs are just around the corner. Unlike existing crypto funds, they will have an official status, with guarantees for investors.

Bitcoin on NASDAQ

Following SVOE and SME, according to The Wall Street Journal, bitcoin futures are scheduled to launch on the NASDAQ exchange in 2018. In addition, according to unconfirmed reports, the SVOE exchange is preparing to launch futures on etherium and bitcoin cache.

For now, the field of cryptocurrencies is very difficult to predict, so exactly how bitcoin and bitcoin futures will develop further will only be known over time.

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