The bitcoin futures market is finally here.
After much anticipation, the Chicago Board Options Exchange (CBOE) began trading bitcoin futures Sunday evening. The first contract was settled on January 17, 2018, at $10,900. This will be followed by rival exchange CME Group, which is slated to begin trading on December 18.
Experts have predicted that this move will pave the way for institutional money to enter the market and may lead to further price increases in the short-term. Others have said that it will lead to a crash in prices.
For those new to the concept of futures and how they work, we’ve put together an explanatory primer below.
The launch of bitcoin futures on Dec. 11, 2017, by CBOE Holdings Inc. and CME Group Inc., has many investors excited.
What are Bitcoin futures?
Bitcoin futures are a contract between a buyer and seller that gives both parties the right to buy or sell a particular asset (Bitcoin) at a predetermined price (strike price) at or before the expiration date.
The buyer’s obligation is to purchase the asset at, or before, the expiration date, while the seller’s obligation is to sell it at an agreed-upon price.
The settlement price of these contracts is based on prices established in regulated exchanges that deal with cash transactions, not derivatives like bitcoin itself.
Futures trading allows investors to speculate on the future value of assets without actually owning them. Theoretically, this could reduce volatility in the market for the underlying asset, but it also enables people to bet against the asset’s price rising.
Bitcoin futures are a way for investors to bet on the future price of bitcoin. These futures contracts, or simply “futures,” allow investors to go long (betting that the price will rise) or short (betting that the price will fall).
Bitcoin futures were first made available in December 2017 after approval from the Commodity Futures Trading Commission. Since then, they have been traded on the Chicago Mercantile Exchange (CME) and the Chicago Board Options Exchange (Cboe), and they are now offered by other exchanges as well.
Bitcoin futures are a new financial product that have recently come to market. They are a contract between two parties where one party agrees to pay the other a specified amount of another asset at a set time in the future. In this case, Bitcoin is the underlying asset.
The buyer of the futures contract is making a bet that the price of Bitcoin will rise above the price stated in the futures contract. The seller is betting that the price of Bitcoin will fall below this amount.
If you are buying and Bitcoin’s price rises, then you make money, because when you go to sell your futures contract you can sell it for more than you paid to buy it (i.e., you get more Bitcoin than you originally paid for).
If instead, Bitcoin’s price falls, then when you go to close out your contract by buying it back, you’ll have to buy it back for less than you sold it for in order to do so (i.e., when closing out your position, you’ll get less Bitcoin back than what you originally paid for).
What does the future hold for Bitcoin? If you believe the crypto-evangelists, it’s a better form of money that will one day take over the world. If you’re a crypto-skeptic, then it’s an overhyped fad that will crash and burn. While I won’t hazard a prediction about its long term prospects, one thing is for sure: Bitcoin has been on an epic bull run in 2017.
According to the cryptocurrency data site CoinMarketCap, Bitcoin (BTC) is up more than 1,400% year to date. It has risen from under $1,000 to over $15,000 in less than 12 months. That’s a huge move by any standard.
But what if you’re not so convinced? What if you don’t see yourself as either a believer or a skeptic? What if you just want to profit from Bitcoin’s epic rise? Well then futures might be right up your alley.
A futures contract is basically an agreement to buy or sell an asset—in this case Bitcoin—at a predetermined price at some point in the future. You and I could agree that I’ll buy your gold watch for $100 in three months’ time, no matter what gold is trading for then.
Before you can understand the bitcoin futures market, you have to first understand Bitcoin itself. Bitcoin is a digital currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are recorded in a blockchain, which shows every transaction made in the currency. The system is designed so there will only ever be 21 million Bitcoins, and so far there are 16.7 million in circulation.
Bitcoin, like other cryptocurrencies, is decentralized. There’s no central bank, and unlike traditional currencies such as the U.S. dollar or Euro, it isn’t tied to any country or government. That means no single entity controls Bitcoin’s value or supply — instead, it’s backed by its users who keep track of transactions on a public ledger called a blockchain. Some speculators have pushed Bitcoin to record highs in 2017 because they believe this technology will become more prevalent in the future and could change how we use money.
Bitcoin doesn’t trade on Wall Street (not yet anyway). It trades on virtual exchanges around the world, and it allows people to make anonymous purchases without going through banks with fees and regulations. It has been touted by some as the currency of the future — but it’s also been volatile and susceptible to hacking and theft like any other cryptocurrency.
A futures contract is a standardized agreement to buy or sell a particular asset at a predetermined price at a specified time in the future. The contract details the quantity, quality, and delivery terms. Futures contracts are standardized by the exchange on which they trade, and traders need not know each other.
The seller of the contract must deliver the asset when the futures contract expires. The buyer must pay up when the futures contract expires.
Futures markets were created to allow producers and consumers of commodities to lock in prices months, even years, in advance of selling or buying goods. People who grow wheat can use futures to ensure that they are able to sell their crop at a set price several months after planting it. This eliminates uncertainty around how much they will be able to sell their crop for and how much money they need to spend on inputs like seeds and fertilizer.