Bitcoin futures have recently become one of the “hot” issues. But what is it? What is their purpose, and what do they look like at all? Well, let’s figure it out.
Bitcoin futures are similar to futures contracts that we find for some commodities or stock indexes, in the sense that they allow an investor to speculate on the price of this commodity in the future.
For example, the Chicago Mercantile Exchange (CME) offers monthly contracts that are settled in cash. This is important for an investor who does not want to manage Bitcoins and prefers fiat money when making payments under a contract.
The first to offer Bitcoin futures contracts was CBOE on December 10, 2017. They then withdrew them in March 2019. Meanwhile, CME started offering them on its futures platform on December 18, 2017.
In addition to standard contracts, the exchange also offers micro-Bitcoin futures, the size of which is one tenth of BTC, and options for futures on BTC.
According to Coinmarketrate.com, other exchanges, such as Bakkt and Intercontinental Exchange, offer daily and monthly Bitcoin futures contracts for physical delivery.
How do they work?
The rules and procedure for creating Bitcoin futures are the same as for futures of any other type of regulation.
First, you need to create an account with the broker or exchange on which the user is going to trade. Once the account is approved, he will be able to start investing.
Futures often use a lot of leverage. This problem is increasing in the world of cryptocurrencies, since the size of leverage on different exchanges can vary greatly.
For example, Binance offers leverage up to 20 times the amount invested. And this has been reduced, since until recently there were 125 of them.
The main thing that should concern a trader in Bitcoin futures contracts is margin requirements for accounts and contract details.
Margin is the minimum security that we need to have in our account to make a transaction. The larger the amount we trade, the more margin the exchange will need to complete the transaction.
An important detail here is that exchanges or brokers may have different margin requirements. For example, CME has basic margin requirements, while brokers such as TD Ameritrade, which offer BTC futures through CME, may require higher margin rates in addition to the rates set by CME itself.
Since Bitcoin is a risky and volatile asset, regulated exchanges often require larger spreads than for other asset classes.
Some cryptocurrency exchanges, such as Binance, allow users to use other cryptocurrencies as margin. For example, stable cryptocurrencies such as Tether.
The purpose of Bitcoin futures is not the same, and each goal is unique for each investor.
For miners, this is a tool that allows them to set the price of BTC to ensure a return on investment in mining. This removes the uncertainty about how much the cryptocurrency will be worth when they finally mine the block.
Investors use Bitcoin futures to hedge their positions in the event of a market collapse. For example, if they bet that the price will rise in the future, they can contract that the price will decrease in order to get a hedge.
Thus, they will be earning money even if the price of BTC does not move along its first concept.
Speculators and traders who usually enter and exit the futures market can use futures to make both short-term and long-term profits.
There are also a number of benefits for trading these instruments, rather than the cryptocurrency itself:
Futures contracts are traded on an exchange regulated by various institutions depending on the country. This gives guarantees to the investor, especially if it is a very large investment institution. This may not be a problem for any of us, moreover, we prefer the absence of regulation, but for funds where it is necessary to comply with certain laws, they become very attractive.
Futures contracts are accounted in fiat, and therefore there is no need in Bitcoin wallet. When the deal is being conducted, there is no physical BTC exchange. Thus, these tools eliminate the risk of owning a volatile digital asset with large price changes. Also, storing Bitcoins can be very expensive and add extra costs to the equation.
Finally, futures contracts have limits in positions and price, and this enables investors to restrict the impact made on certain asset.
The Bitcoin futures market has grown very strongly, almost in parallel with the growth of the cryptocurrency spot market.
Exchanges were the first places where it was possible to buy and trade futures for major cryptocurrencies, but their disadvantage was that they did not have a large number of regulations, and this did not make them attractive to investors with very large capital or managing other people’s money.
The launch of the Bitcoin futures market by CME and Cboe is designed to solve this problem. While Cboe has stopped using these financial instruments on its platform, CME has assumed more obligations on them and introduced other related derivative products.
For example, Micro Bitcoin futures represent one tenth of a BTC futures contract on CME.
Bakkt, backed by NYSE owner Intercontinental Exchange, was launched in 2019 and claims to be a comprehensive solution to facilitate regulated price discovery and market liquidity. It also offers trading in physical futures and options on Bitcoin.
ErisX is a Chicago-based investment company offering cash-settled futures trading, which limits the risk to cryptocurrencies by setting lower and upper limits.
The Seychelles exchange Okex and the Maltese exchange Binance are among the major cryptocurrency exchanges offering futures of this type.
The latter, in fact, is the exchange with the largest number of open contracts on its platform. Unfortunately, it is not regulated by a country accustomed to such financial products, for example, the United States or some European countries.
Like stocks and commodities, Bitcoin futures allow an investor to speculate on BTC without risk. The investor can choose from a wide range of BTC futures contracts. Some of them are regulated, and some are not.
It is necessary to understand that the price of Bitcoin is very volatile, which makes it a very risky investment, especially with futures. Although the trading volume of these derivatives from BTC has grown significantly, we are still dealing with an asset whose dynamics and creation are just emerging.
Therefore, they are very different from futures of other asset classes. Due to the huge fluctuations when prices rise like a bubble and then burst, Bitcoin has a reputation as an asset with too high volatility.
All this makes us think that perhaps BTC futures are not an effective hedge against the volatility of the underlying asset.