Bitcoin futures trading: who’s in, who’s out?
Bitcoin futures trading has begun which proves it has finally come out from the dark corners of the internet to the forefront of the world of finance.
There is no doubt that since bitcoin crossed the $10,000 mark, there really has been something of a ‘Bitcoin Mania’.
While it has been subject to both skepticism and ridicule, it is now truly becoming mainstream through Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) which are now offering bitcoin future contracts.
Who else is joining the futures trading club?
With CBOE leading the pack with Bitcoin futures (XBT), it will soon be followed by CME which will be launching its own version of the futures (BTC), which will start trading on 17th of December.
Nasdaq is a working towards launching its own futures trading but this will come in the second quarter of 2018.
After the initial news of bitcoin futures trading being offered by CBOE and CME, Bloomberg inquired with brokers whether they will be taking part in the action. Both Ally Financial Inc. and TD Ameritrade Holding Corp has shown keen interest and have told Bloomberg that once they become available, they will be pushing them to their customers.
It has also been reported that Deutsche Boerse, the German marketplace that offers securities and share trading is also considering to launch bitcoin futures (if it does, it will be the first European exchange offering them).
Are the bitcoins in play already bought by these exchanges?
CBOE began bitcoin futures trading on December 10th. They listed three separate futures, January, February and March and the final value of the contracts being traded will be determined through the price of bitcoin on Gemini, the exchange run by Winklevoss twins. At the time of writing this post, bitcoin was valued at 17709.82 USD. Do remember that each contract will get you one Bitcoin.
The contracts are all cash settled. CME will also be offering cash settled contracts allowing investors to receive their payout in cash and not in bitcoin.
What is cash settlement?
Basically here’s an example that will make things clear for you: if you were to buy a futures contract of $16,000 saying that it will be valued at this price after 10 months, then assume that after 10 months, the price is actually $19,000.
The seller (in this case CME or CBOE) will pay you back with $3000 difference. This is called the cash settlement.
This means that both exchanges don’t have to worry about setting up their own wallets to store bitcoin, circumventing the problem of security as well.
Margin requirements are high!
CME which will begin trading on 17th December has announced that it will be increasing the margin rate from 35% to 47%. In a message sent to its users, the exchange told that it is increasing the margin rate due to the volatility of bitcoin.
A little lesson in margin requirements – it is the amount of money investors have to put on the table as collateral so that everyone else in the trade know that losses will covered. It should be mentioned here that margin rates of bitcoin are considerably higher compared to gold and oil.
How will bitcoin futures trading affect its future price?
As soon as the news hit that bitcoin futures are going to be introduced, there was a surge in bitcoin price.
After the initially announcement and the promise of other reputable Wall-Street names starting their own exchanges, many are becoming less sceptical about bitcoin.
One of the leading factors that is pulling everyone into bitcoin is the FOMO effect. FOMO or the fear of missing out is attracting investors with Coinbase looking at 300,000 new users in just four days between 22nd and 26th of November.
Another major concern is that both new exchanges will allow institutional investors to easily bet against bitcoin. And considering that there are still many in the financial markets that feel that
bitcoin is one large bubble waiting to get burst, chances are they will tank its price.
But there’s a bright side to this all as well. With prominent and well respected players coming into cryptocurrency sphere, investor confidence will increase. This would mean that more people will pour money into bitcoin, increasing its market capitalization.