What are Bitcoin Futures
In December 2017, two of Chicago’s oldest exchanges, CBOE and CME Group, began trading Bitcoin futures. Thus, cryptocurrencies have become available to traditional investment investors.
A futures contract is an obligation to buy or sell a certain amount of Bitcoin at the price specified in the contract, up to a certain time, which is also stipulated in the contract.
As a guarantee of the fulfillment of the contract, guarantee collateral is provided, which is also called the futures price. When concluding a contract, the user pays only guarantee coverage. In classic futures, guarantee coverage is 10 to 15% of the transaction price.
However, cryptocurrencies are very risky assets, so the price of guarantee security can reach up to 50% of the total contract price.
When concluding a contract, the trader must pay for the guarantee. In the case of Bitcoin, it is up to 50%. Thus, by paying a guarantee, a trader can dispose of Bitcoin without actually owning it. After all, futures are derivatives – derivative obligations. The asset itself does not exist, but the obligation on it already exists. Bitcoin trader will own only in the future, and can dispose of it after the conclusion of the contract and payment of the guarantee. Thus, thanks to futures, you can sell what you do not have, but there is only an obligation to buy it in the future.
Throughout the duration of the contract, the trader must buy Bitcoin at the market price. If during the futures contract the price of Bitcoin reaches the price of the contract, the trader can sell Bitcoin without actually owning it. However, if the trader is confident that Bitcoin will continue to grow, the trader may not sell Bitcoin, but wait for the contract to close at the market price.
A Brief History of Futures
The first futures contracts appeared in Mesopotamia in the XVIII century BC. E. Actively used futures traders from around the world. Usually this concerned the supply of an un-grown and not harvested crop. Even before the harvest, the peasants sold the future crop at a certain price and in a certain amount. This protected the rights of the peasants, since they were sure that they would receive a certain price for the crop and could already plan their future income and expenses. This also protected the rights of merchants, as they knew that peasants would not be able to raise prices higher than previously agreed upon and could preliminarily calculate the volumes of supplies and income from the sale of goods.
In modern history, futures contracts have appeared in Japan and related to the supply of rice. Rice is a rather complicated culture for growing and it was important for peasants to know that for their work in the future they will help out a certain price in order to plan the volume of work and crops for the next year.
Gradually, the experience of the Japanese was adopted by both Western and American markets. There were exchanges on which contracts were concluded not only for the supply of future rice, which has not yet ripened, but also for other products and goods, and in the future simply for future deliveries, future services or future settlements.
The standard for a modern futures contract was developed by the Chicago Board of Trade in 1865. And if initially contracts were concluded for future deliveries, then at present contracts are concluded mainly for future settlements between the parties. This is the main form of derivatives on many exchanges.
How Bitcoin Futures Works
Let’s look at a specific example of how Bitcoin futures work and what advantages it brings to traders.
Suppose a trader entered into a futures contract and paid for guarantee coverage. At the time of the contract, Bitcoin was worth $ 8,000. The trader suggested that by the time the contract is executed, that is, in a month, Bitcoin will cost $ 10,000. As soon as Bitcoin rose to 10,000, the trader sold Bitcoin, without actually owning it, and earned on the difference in rates.
Thus, a futures contract provides the so-called leverage. If the trader is confident that Bitcoin will continue to grow, he may not sell it, but wait for the transaction to close. By paying only a guarantee, the trader will be able to earn on the difference in rates, as if he had owned Bitcoin all this time. Even considering the huge guarantee coverage of 50%, the trader can conclude 2 contracts, instead of one purchase of Bitcoin. Thanks to the futures, in case of an increase in exchange rates, a trader will be able to double his profit compared to what he would have received simply by owning Bitcoin.
However, if Bitcoin starts to fall or simply does not rise above the mark, then the trader will be forced to buy Bitcoin at the market rate. And the whole difference between $ 10,000 and the market price of Bitcoin at the time the contract expires will be deducted from the guarantee. However, if Bitcoin drops sharply, you cannot deduct the difference above the amount of guarantee coverage. Thus, the trader risks only guarantee collateral or part thereof.
A trader can play for a fall. In this case, his losses will be less. Only here incomes will also decrease.
What is interesting for futures
Future is interesting because thanks to this tool, large venture investors, banks, and financial circles began to pay attention to cryptocurrencies. Legislators followed the financial field. The governments of many countries of the world decided that cryptocurrencies should be regulated, and at the same time cryptocurrency traders and investors should pay taxes.
After the launch of futures, a whole wave of cryptocurrency regulation passed. The authorities of many countries began to develop rules for the control and regulation of cryptocurrencies, exchanges, ICOs. KYC rules and anti-laundering laws have been developed and adopted. But traders and investors were forced to pay taxes. Some were made very rude, having previously blocked their bank accounts.
All this interest from the authorities led to the fact that cryptocurrencies began to fall.
The impact of futures on the exchange rate and the Bitcoin market
Some experts believe that Bitcoin futures investors are to blame for the fall of cryptocurrencies. Most traders, concluding futures in order to reduce their losses, played for a fall.
Ordinary investors, seeing that large financial traders and brokers are playing for a fall, also decided not to take risks, but to get rid of their assets while the price is high. This triggered a chain reaction.
In addition, at the end of 2017, many newcomers came to the cryptocurrency who bought cryptocurrency at the peak of its popularity at the highest prices. Seeing that the price of cryptocurrency is falling sharply, newcomers began to actively sell it, finally reducing the price of Bitcoin and other cryptocurrencies.
However, it is too early to draw definite conclusions. Now experts blame the fall of cryptocurrencies for everyone: the authorities that tightened cryptocurrency regulation; And Bitcoin futures, in which investment traders, playing on a fall, provoked a massive sale of cryptocurrencies; And “whales”, which sharply began to sell cryptocurrencies, because there is an opinion that 40% of Bitcoin owns 1000 “whales”.
In fact, investment traders were so careful about the new asset that they could not significantly affect the cryptocurrency rate. Bitcoin futures trading volume was very small even compared to cryptocurrency exchanges.
And the fact that cryptocurrencies are not stable and any news or even a rumor or speculation can crash the course, any, even not very experienced trader knows. Therefore, in the classical financial markets, trading in Bitcoin futures is not in great demand.
Will there be a demand
Bitcoin futures trading volumes are gradually increasing. Cryptocurrencies have already reached their minimum. At least Bitcoin is being sold at the cost of its mining. Cryptocurrency prices have become relatively stable.
Many countries have enacted legislation to regulate cryptocurrencies. Bitcoin is becoming more stable, predictable. And this is exactly what large investors need. As Bitcoin stabilizes, interest in it also grows from traditional exchanges.
The volume of contracts concluded for Bitcoin futures continues to grow.
Many large cryptocurrency exchanges are now actively struggling with fraudulent course manipulation technologies, various Pump & dump schemes. All these measures, together with toughening the requirements of regulators, also contribute to the stability of cryptocurrency rates.
How futures will change the economy of cryptocurrencies
Investment investors need stability and predictability. These people are used to counting money and forecasting their future earnings. Therefore, the asset that is difficult to predict is of little interest to them. This is evidenced by the low volume of trading in Bitcoin futures on classic exchanges.
However, as the stability of cryptocurrencies grows, so does the interest on the part of investment investors and financial circles.
Cryptocurrencies are not widely used. To increase the rate of cryptocurrencies, it is necessary that they are widely used by stores, they should be a convenient means of payment. Cryptocurrencies must be stable and reliable. Exchanges and wallets should not be hacked, and investors should not be afraid to lose their savings at any time.
When all this happens, cryptocurrencies will become very interesting to large investors, because they provide such opportunities, but so far it is still very difficult to predict cryptocurrencies. The more stability there is, the more interest in cryptocurrencies.