In December of 2017 we saw an explosion of mainstream cryptocurrency adoption that was partially triggered by the creation of the first every Bitcoin Futures. This was a pretty big deal for the cryptocurrency community as it added another layer of legitimacy to Bitcoin as a viable long-term financial market. The hype was palpable and you couldn't go on a forum, social media, or crypto website without it being pushed in your face like that new crappy pop song on your favorite radio station. While the addition of these Bitcoin Futures did not spell doom like many had though, it still leaves many newbies in crypto asking, “What are Bitcoin Futures?”. Follow The ‘Stache as I break it down simple for everyone to understand what these futures are and how they work.
Back To The Futures
Before we dive in I think it best to explain quickly what “futures” are in general and then we can drill down to exactly what a Bitcoin future is. Futures are an agreement to buy or sell an asset (like stocks, bonds, or even Bitcoin!) on a specific date in the future at a specific price (regardless of the market price at execution date). This is basically a “bet” that on the agreed upon date your guess at the price will pay off by being lower (or higher if you are buying) than what you sold at. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. This investing strategy is mostly used to protect against wild swings in volatility for an asset that is traded on a daily basis, so you can see why people think it would be great for Bitcoin. Here is a good example of how a futures contract might play out:
We say that oil trades at $10 per barrel. An investor expecting the price of oil will rise, buys a three month futures contract for 1,000 barrels at the current price of $10. This contract is worth $10,000.
If in three months, when the contract expires, the price of one gallon of oil barrels is $15, the investor now profited $5,000.
What Are Bitcoin Futures?
Bitcoin futures work exactly like regular futures do! While they are not a physical asset like oil or wheat, even digital assets can be traded on a futures contract. Once again, you are basically making a bet on the future price of what Bitcoin will be. The difference with Bitcoin futures is you don't even need to own any actual Bitcoin to trade these futures! Bitcoin futures are traded and settled in cash (USD) and not in Bitcoin. This allows traders that don't want to touch an “unregulated” asset to trade Bitcoin futures on a regulated exchange. This is a big step in the right direction as Bitcoin certainly tends to get the shaft from most of these mainstream investing firms. Now the wolves can speculate on Bitcoin without actually hodling!
Is that really a good thing??
The Bitcoin Wolf Pack
Now that we know what futures are and what “Bitcoin futures” are, is this really a good thing? Bitcoin futures were first introduced by the CBOE and then shortly by the Chicago Mercantile Exchange (CME). The buzz around this event certainly got massive mainstream exposure and in-turn I think we saw a lot of new people get involved in cryptocurrency because of it. December 2017 was the craziest month for cryptocurrency in its history. You can see from these Cointelegraph stats that Bitcoin futures were certainly good for the crypto market.
The day after Bitcoin futures were launched on the Chicago Board Options Exchange (CBOE), for the first time on a major regulated exchange, the price jumped by almost 10% to $16,936.
Similarly, in the run-up to the launch of Bitcoin futures on one of the world’s biggest exchanges, CME, the Bitcoin price broke through the $20,000 barrier.
The long-term price impact is harder to predict, but in all likelihood, it will continue to boost the price of Bitcoin.
The Future Of Futures
So now we know what Bitcoin Futures are. Essentially a gamble on the future price of Bitcoin that is setup to be an easier vehicle for institutional investors that won't (or can't) trade directly with Bitcoin. Will the futures market heavily affect Bitcoin or cryptos in the long run? My thought is no, but only time will tell in such a young market. Personally I don't engage in trading futures as cryptocurrency changes so much and so rapidly on a daily basis I couldn't imagine betting on the price in 6 months!