Last week we looked at the reasons why bitcoin’s price is rising fast. This was after the price of bitcoin had surpassed $20,000 internationally.
We identified one of the reasons as the coming bitcoin futures contracts to be offered on regulated exchanges. Bitcoin futures are set to be offered on Nasdaq, the second largest stock exchange in the world from 2018.
Investors do not have to wait until 2018 to deal in bitcoin futures though. The Chicago Board Options Exchange (Cboe) started trading in bitcoin futures yesterday, the 10th of December. Now, note that the Cboe is the largest U.S. options exchange.
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Oh and what a start it was for the new futures, volumes exceeded expectations with about 2300 contracts changing hands in just hours. There was so much interest that Cboe’s website crashed. Trade also had to be halted twice to cool price volatility, once when the price rose by 10% and the second time when it rose by 20%. The futures eventually surging more than 25%.
There is another exchange set to introduce bitcoin futures from next week, the CME Group. It seems Wall Street is going all in on bitcoin futures.
What are bitcoin futures?
In reading all this you might be wondering what exactly is meant by bitcoin futures. We touched a bit on it when we looked at why bitcoin’s price is rising.
Futures are basically forward contracts. I know that may not mean much to some. To understand what futures are let’s look at a simplified example.
The investors purchasing bitcoin futures are not buying bitcoins. They are simply gambling on the price of bitcoin.
Jack says, ‘I want to bet on the price of bitcoin rising, from the $18,000 it is today to $20,000. So I will buy a bitcoin from you for $18,000 in say, one month’s time. That way the $2,000 difference will be my profit.’ Jack is said to be going long.
Kuda thinks, ‘this bitcoin is a fraud, the price may be $18,000 today but it will be $12,000 in a month’s time. I will take up Jack’s offer. I will sell him a bitcoin for $18,000 in a month’s time. I’ll be able to purchase one for $12,000 and sell it to Jack for $18,000, making a $4,000 profit.’ Kuda is said to be going short.
Now note that neither Jack nor Kuda actually want bitcoins. They will just settle their debts by referring to bitcoin’s actual price. So that makes their little contract there a derivative, so next time do not be intimidated by that term. It is simply a contract based on an underlying asset or commodity, bitcoin in this case.
Will these futures affect actual bitcoin’s price?
Yes, definitely. The price of bitcoin actually shot up when trading in bitcoin futures commenced.
If investors are betting that the price will go up in their futures contracts, the rest of us will think they might know something we don’t. After all these investors are billion dollar companies with army sized teams analysing these things. This might affect buying patterns and affect the price of bitcoin itself.
Or they could drive the price lower. Some have said that some investors will find that it makes more sense to invest in the futures rather than bitcoin itself. It could be argued that the bitcoin futures market is safer than buying actual bitcoin. Theses investors could be institutional investors withdrawing their millions from bitcoin itself and investing in futures.
We will keep following the progress of bitcoin and also the bitcoin future market. Do you think these futures will have a profound effect on the price of bitcoin?