Bitcoin Futures and Their Implications

Bitcoin Futures and Their Implications

By | 2017-12-19T22:09:55+00:00 December 12th, 2017|Tags: , , , , , |

Bitcoin critics and enthusiasts have both had a lot to say in terms of their opinion with regards to Bitcoin futures being launched by Cboe and CME. Enthusiasts have proclaimed future contracts will transform the Bitcoin by placing it on a fast track lane to full adaptation by financial institutes with more professional traders and well known Wall Street firms trading it and thus legitimizing it as a genuine legitimate currency. Thus in turn decreasing volatility, making it less vulnerable to manipulation and also making it a more attractive investment for traditional investors. However on the other hand critics argue that it’s still too premature to accept future contracts and given the volatility of the markets it presents a significant danger to clients, with futures possibly adding to the volatility.

Future’s? And the future for the Bitcoin

So what exactly is a futures contract? A futures contract enables its clients to trade by placing a leveraged bet on whether the price of the currency or asset will increase or decrease before the contract expires. This is done by traders going “long”, which is a bet to state that the price in the future will increase or if they expect the price to fall they can go “short”. However in reality traders will not possess or actually buy and sell any Bitcoin’s and will make their money from other futures traders losing bets.

In terms of what Bitcoin futures offer the Bitcoin, JJ Kinahan who is the Chief Derivatives Strategist at AmeriTrade summed it up well by stating “This is your first opportunity to take a bitcoin derivative and put it on a centrally cleared exchange that has transparency,”. Which basically means this is a step towards placing it into an actual financial system that is regulated and has transparency, which provides consumers more safety and protection. As there are numerous safety concerns with Bitcoin exchanges particularly after the Mt. Gox scandal when potentially billions of dollars of Bitcoin’s valued today went “missing” due to an alleged “hack”.

More stability or more vulnerabilities?

Shorting

This maybe the first time when traders can effectively “short” the Bitcoin, which is basically placing a bet to state that the price of the Bitcoin will fall and if it does the trader can make money off that bet if they are correct. Traders are hopeful that this will help decrease extreme volatility the Bitcoin faces at times which is normally due to major events such as forks or further adaptation of the Bitcoin by traditional financial firms. For example we saw the Bitcoin’s price reach the $19,000 mark on some exchanges after the Bitcoin’s futures announcement before retracing to just above $15,000. This will also help attract more investors and traders, particularly “Bitcoin bears” to trade the Bitcoin.

Automated trading systems

Another benefit of having the Bitcoin futures is that it will enable firms and traders to use “quantitative trading systems” which is basically an automated system that decreases the possibility of human error by a wide margin as trading will be done or facilitated by computers as opposed to humans. Quantitative trading systems look at price, historical data and numerous other factors before making a trade. Thus further adding stability to the markets as we usually see major price movements taking place due to possible manipulation that we saw with the Bitcoin cash saga when misinformation was spread that Bitcoin developers had switched to Bitcoin cash which in turn caused a sharp price decrease. When the rumors proved to be false, the Bitcoin bounced back even higher.

A little too early?

However it is important to state that numerous firms, brokers and even banks have criticized the launch of Bitcoin futures as being done too early, particularly with a digital currency that the majority of the financial institute still does not understand or has grasped. This has fueled fears that complete adaptation by financial institutes still maybe a long way off, with the waters still being tested. But with the Bitcoin market being worth hundreds of billions of dollars, it is the over-sized baby elephant in the room that is becoming harder and harder to ignore.

Conclusion

To conclude, it is hard to argue against the fact that the launch of the Bitcoin futures is significant event in Bitcoin’s recent history as it is one the first major adaptations of the Bitcoin into the financial infrastructure. It is also hard to argue that this is the end road for the Bitcoin as next year and in the years to come more financial institutes such as JPMorgan have also announced they may trade Bitcoin futures and more importantly Nations and countries have also expressed interest in adopting and using the Bitcoin directly as their very own digital currency. The future for the Bitcoin seems bright and it appears it will only get brighter.

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