What are Bitcoin Futures
Bitcoin futures are a relatively recent development, introduced after regulatory approval in late 2018.
They allow you to trade at the future value of Bitcoin, but without the use of exchanges. The introduction of Bitcoin futures led to some interesting events during this year.
Firstly, for those who are poorly versed in financial terms, it may be interesting to find out what Bitcoin futures are all about?In a futures contract, two parties agree to trade a certain product at an agreed price at a certain point in the future. For example, imagine a farmer who sells crops at the beginning of the growing season. If the grain price falls before the harvest, this farmer will receive a loss.Buyers of its grain are in the same position, but on the other side of the equation. If the price of grain rises, they will sell their products at a loss.Futures are a way to protect against these fluctuations. The buyer and seller agree to conclude a specific transaction at an agreed price by a specified date in the future.An agreement is a binding agreement by which parties must enter into a transaction regardless of whether it is winning or losing. Financial traders use futures as a way to speculate on the future price of an asset. If they believe that prices will rise, then buying assets at a fixed price allows the trader to sell these assets or the futures contract itself more expensive when market rates rise.
This is a risky business, and making a profit depends on a deep understanding of the essence of market fluctuations.
Bitcoin futures work in a similar way. By buying and selling Bitcoin futures contracts, investors can speculate on the future value of cryptocurrencies without even owning the asset itself.
Bitcoin futures existed until 2018, but were traded only on cryptocurrency exchanges as unregulated assets. Bitcoin regulated futures were introduced at the end of 2017.
Within one week in December last year, two well-known futures exchanges began trading in Bitcoin-based futures – the Chicago Options Exchange (Cboe) and the Chicago Mercantile Exchange (CME).
The financial community has welcomed the introduction of these futures. This was the first opportunity to participate in the trading of bitcoins without buying them. It also ensured the security and legitimacy associated with compliance.
In addition, trading in Bitcoin futures has advantages for investors in countries where cryptocurrency trading has been banned. This is due to the fact that futures trading is not trading bitcoins themselves.
The crypto community also saw a surge in initial excitement when introducing Bitcoin futures. It was believed that an increase in liquidity could occur in the market as a result of the influx of new investments.
In anticipation of these events, the price of Bitcoin has been steadily increasing. The Cboe website crashed the same day that Bitcoin futures trading opened and the cryptocurrency price increased by 10 percent.
The average daily volume of trading in Bitcoin futures in the second quarter increased by 93% compared to the previous quarter, while the level of open interest exceeded 2,400 contracts, an increase of 58%.
When a week later, CME also opened trading in Bitcoin futures, the price of bitcoin reached its record level of 20 thousand dollars. Although, as we all know, this did not last long.
During the first few months of 2018, the price of bitcoin was steadily declining.
Because of this fall, news agencies began to speculate on whether the introduction of futures did more harm than good.
WSJ published an analysis in January that showed that while small investors had bullish sentiment at the price of bitcoin, institutional futures investors took a bearish position, knocking down the price.
In May, the San Francisco Federal Reserve Bank published an article stating that soaring Bitcoin inflation was triggered by upbeat investors who were convinced that the market would continue to grow.
The article stated that the introduction of Bitcoin futures gave pessimistic investors the opportunity to enter the “short” on bitcoin. This kind of game for a fall did not exist before.
Although it is entirely possible that the introduction of regulated Bitcoin futures led to a drop in market prices, trading volumes do not speak in favor of this theory.
In July, a message appeared on CME Group on Twitter that their trading statistics for the second quarter showed an average increase in daily volume of 93 percent compared to the first quarter.
If the Fed’s theory is correct, such a sharp increase in Bitcoin futures trading should have affected the value of bitcoins in the second quarter of 2018 even more than in the first.
Especially if the predominant trend is shorting. However, the Bitcoin price chart for 2018 clearly shows the steepest market fluctuations in the first quarter.
The first quarter of 2018 was clearly more volatile than the second.
In addition, Bitcoin futures trading volumes were generally seen as weak, even immediately after their launch in December.
It can hardly be assumed that such a low volume of transactions can lead to a significant drop in prices.
The future of Bitcoin futures: physical settlement will boost the popularity of Bitcoin ETFs
CME and Cboe introduced cash-settled bitcoin futures based on the price of bitcoin on cryptocurrency exchanges.
However, cryptocurrency exchanges remain unregulated. The next major development on the path to cryptocurrency futures is the introduction of physically regulated futures contracts.
The company Intercontinental Exchange (ICE), which owns the NYSE, has formed a startup called Bakkt, which will release futures that will use the bitcoins themselves.
This is the next step in the evolution of Bitcoin futures, which will allow them to better meet the requirements of regulators.
Bakkt announced it will launch a Bitcoin futures offer in December this year.
This in itself may be a step that will attract additional institutional investment in the cryptocurrency market.
However, there is speculation that the introduction of physically regulated futures could help the Securities and Exchange Commission to allow Bitcoin ETFs.
During previous failures, the SEC referred to the dependence of cryptocurrencies on unregulated exchanges and the total size of the bitcoin market as reasons for refusing such ETFs.
Physically regulated futures can also bring liquidity to the market, which means that Bakkt will be able to break down the barriers to SEC approval.
A couple of thoughts in the end
2018 was the first year of the existence of regulated Bitcoin futures, and the story is still far from over.
The introduction of Bitcoin futures may well be the beginning of a very interesting story.
In subsequent years, their evolution will clearly show how Bitcoin and other digital currencies were accepted by major financial markets.