Bitcoin futures began trading on the Chicago Board of Exchange (CBOE) on Sunday, 10 December 2017 at 6 PM EST.
For the year to date (2017), the price of Bitcoin has surged from approximately $990 to well over $17,000. That represents a 1,700% + appreciation, or nearly a 20-fold increase over the year. This unprecedented gain in the cryptocurrency’s ‘value’ is perceived by many to be a bubble. A recent CNBC Fed survey was conducted in December, where 80% + of respondents indicated that they believed Bitcoin’s current price is overly inflated and has all the classic symptoms of a bubble.
In the same poll, 17% remained unsure about the future prospects of the cryptocurrency, and 2% agreed that the current valuation is based on fundamentals. It’s interesting to point out that when the CBOE launched a Bitcoin futures option, it spiked approximately 20% to $18,545 for delivery in January 2018. Bitcoin futures are considered a hedge against BTC volatility, particularly for investors and traders who are looking to shore up their Bitcoin investments in the opposite direction. By betting against Bitcoin in the futures market, institutional investors and traders can protect themselves against market downturns.
For the rest of Bitcoin’s fan base, the futures market serves as a gauge of overall sentiment. If Bitcoin futures markets are bullish, traditional Bitcoin traders and investors will likely follow suit. If Bitcoin futures markets are bearish, the similar results can be expected. It is worth pointing out that futures markets offer benefits that are unavailable during traditional Bitcoin trading and investing. For starters, here are 6 unique ways why it may be more beneficial to invest in Bitcoin futures:
- Profit in Any Direction: With Bitcoin futures, traders and investors can take a long or short position on the underlying cryptocurrency i.e. Bitcoin. Money stands to be made by betting on future bullish movements, or bearish movements of the digital currency. Unlike traditional Bitcoin investments where Bitcoin (BTC) is bought and held for an indeterminate period of time (for appreciation to take place), Bitcoin futures do not require this.
- Transparent Pricing Determines Futures Contracts – the Bitcoin futures markets offer contracts that are settled at the end of the day with 100% transparent reference prices. These reference prices are used across the board in all sorts of contracts, and allow for greater credibility and widespread acceptance with traders. Much the same is likely to happen with Bitcoin being embraced by a larger global community.
- Bitcoin Futures Do Not Require Bitcoin to Be Purchased: Traditional Bitcoin trading requires the investor or trader to buy the cryptocurrency and hold it in a digital wallet, or with the trading platform. This is inherently risky as a result of cybersecurity threats, fraud, loss of private keys and other cryptographic data etc. Bitcoin futures are speculative markets where no actual Bitcoin needs to be held. It is simply based on price speculation. In other words, traders and investors forecast which direction they believe markets are going to move in the future and hedge their bets accordingly.
- Bitcoin Futures Are Run by Professionals and not by the inventors of Bitcoin. This means that there are rules and regulations in play that will stabilize market activity. For example, circuit breakers cut off trading activity when too much volatility hits the markets. This is designed to help traders against whipsaw movements in prices. Traditional Bitcoin exchanges and platforms do not have any such circuit breakers in play, and market trading can continue unabated regardless of how high or low Bitcoin’s price rises or falls. This leads to enhanced price discovery on Bitcoin futures markets and traders will have a much better understanding of how to price the currency for future-dated trades
- Bitcoin Futures Markets Are Fully Regulated by the CFTC – this is an important distinction between Bitcoin trading and the futures markets. The Commodity Futures Trading Commission is a government-run entity that oversees the futures markets. This is good for Bitcoin and the futures markets in that it lends additional authority and credibility to both. With a level playing field available to all participants, investors, traders and speculators can dabble in Bitcoin futures contracts at will. This also increases trading volume for traditional Bitcoin exchanges and establishes inviolable rights for the digital currency.
- Futures Contracts Are Secure – unlike traditional Bitcoin exchanges and platforms, Bitcoin futures contracts are fully regulated by the CFTC and your trades are unlikely to go missing. Even if the exchange goes down, there are detailed records in inventories of trader activity. Nothing gets mislaid in the futures markets, but it might with traditional Bitcoin trading. Think of the Mt. Gox fiasco and several others, as cases in point.
Those are 6 reasons why Bitcoin futures trading may be preferred to conventional Bitcoin trading. A better approach is a combination of Bitcoin futures trading as a hedge and traditional investments and trades in the Bitcoin market.