The launch of the CBOE and CME bitcoin futures options in late December 2017 has stirred up investor interest in these vehicles. NASDAQ, for example, announced in January that it is researching the idea of altcoin futures.
"We continue to look at the risk management around that, making sure we are putting the right protocols in place, making sure there's proper demand, and that the contract is different from what's already out there", Adena Friedman, CEO of NASDAQ said to CNBC.
The impressive growth of the altcoin market and the continued bitcoin speculation frenzy have kept investor interest high in these financial vehicles. The emergence of bitcoin futures demonstrates a way traditional monetization of commodities has made its way into the altcoin world, exposing a new class of investors to altcoins.
What are Bitcoin Futures?
Futures are financial derivatives in which the holder promises to buy or sell the underlying asset for a set price at a set time. These devices allow an asset to be traded with leverage, as the holder is not bound to the market price. A future can be satisfied with the delivery of the asset or the paying off of the asset's worth. In the case of bitcoin futures, bitcoin is the underlying asset.
Here is a way to think of this. Imagine an investor purchases a bitcoin future with a three-month expiry worth $17,000. If, at the end of the three months, the price of bitcoin is at $20,000, the investor makes $3,000 on the future contract. Likewise, if the price of bitcoin is at $11,000 at the expiration of the future, the investor must buy that unit of bitcoin at $17,000, meaning he will lose $6,000. Of course, the investor has the option of trading away his future contract at any time up until the expiry.
Why Should You Invest in Bitcoin Futures?
Bitcoin futures solve two of the largest complaints of bitcoin investors. First, bitcoin futures allow you to invest in the bitcoin market without actually needing to buy bitcoin. This eliminates any problems with safe storage and asset management, making the instrument ideal for institutional portfolios. Second, bitcoin futures are exchange-traded, meaning that they are subject to the same protections any other exchange-traded commodities enjoy.
Additionally, bitcoin futures allow you to benefit from bitcoin price volatility. Typically, in a bear market, the only way you could make money is to buy more coins at a lower price and prepare for a return to a bull market. With futures, you can now sell to hedge against market crashes and can actually take positions on price deflations.
While buying the altcoin itself may be the better route for long-term individual investors, bitcoin futures present an interesting option for those seeking to profit from intra-day or intra-week bitcoin trading. The fact that the two existing bitcoin futures are set up for margin trading means that they are best positioned for day trading.
Here's a quick summary of the futures offered via CME and CBOE:
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The Larger Implications of Bitcoin Futures
Bitcoin futures' most important role, however, may have nothing to do with investing strategy. Bitcoin futures represent the first time mainstream finance has paid real attention to bitcoin. This may represent a trend of acceptance that may help bitcoin and other altcoins one day find full acceptance in the financial world.
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This is a good way for ignorant people, who understand neither Bitcoin nor futures, to lose even more of their money.
That's why you should never invest more in bitcoin, or in bitcoin futures, than you are willing to lose.