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Bitcoin's sword of Damocles? The listing of Bitcoin futures can be dangerous

The CME and the Chicago Board Options Exchange (CBOE), the two trusted, well-regulated exchange-traded exchanges that are going to launch bitcoin futures, are troubling the financial press.

The CME Group, one of the largest and oldest derivatives exchanges in the world, will introduce Bitcoin futures on December 18. CBOE Global Markets, which owns the Chicago Board Options Exchange (the largest US exchange) and BATS Global Markets, plans to open its own Bitcoin futures deal on December 10 to beat CME.

This opens the door to institutional investors and retail investors in theory: they want to come into contact with bitcoin, but for some reason (because of internal rules, or the risk of disgust, sophisticated trading methods and wallets Difficult to use) can not trade the actual bitcoin.

And as far as I know, their interest comes in part from the bitcoin's recent price of more than $ 11,000 (compared to $ 1,000 at the beginning of the year, which is phenomenal).

But if this is true, I do not understand why people think Bitcoin has a huge market demand.

Futures trading started

First, I'll briefly describe how the futures work: Suppose I think XYZ, currently trading at $ 50, will rise to $ 100 in two months.

Someone gave me a chance to promise that I could buy XYZ for $ 80 in two months. Then I accepted it, which means I "bought" a futures contract. If I am right, I will pay $ 80 for something worth $ 100. If I'm wrong and its future price gets lower, I will be happy to pay for it more than it is worth in the marketplace.

Or, if I think XYZ prices will fall, I can "sell" a futures contract: I promise to sell XYZ for $ 80 in two months. When the contract expires, I buy XYZ at the market price and give it to the contract holder in exchange for the promised amount.

If I am right, I am profitable when market prices fall below $ 80.

In addition to this basic premise, there are various blending strategies, including holding related assets and hedging: for example, I hold XYZ and sell futures contracts at a higher price, which I previously promised to sell.

If the price goes up, I make money on the related assets, but lose on the futures contract. And if it falls, the situation will be reversed. Another common strategy is to "lock in" prices by buying and selling futures contracts at the same time.

The current contract has a wide range of goods and financial instruments, and terms and conditions vary.

This is a complex area where a lot of money is traded. The gold futures market (measuring contract-related assets) is almost 10 times the size of the gold spot market.

How could this be? Why can you hold more gold futures contracts than spot gold? Because the contract expires when you do not have to provide real delivery of gold. Many futures contracts settle in "cash" rather than physical delivery, and the buyer receives the difference between the futures price (= agreed price) and the spot price (market price).

If the above XYZ contract was done in cash, and the market price at the end of the two months was $ 100 (as I predicted), instead of XYZ, I received $ 20 ($ 100 The difference between the market price and the $ 80 I promised to pay).

CME and CBOE futures are settled in cash, not the actual bitcoin. Imagine the legal and logistical troubles required if the two reputable, regulated exchanges must have a custodial wallet.

Therefore, the Bitcoin futures market may be larger than the Bitcoin spot market.

side effect

This is very important. why? Because institutional investors will like it. The size and liquidity of Bitcoin futures make fund managers a lot easier than usual.

The bitcoin market seems thrilled by the influx of institutional funds into bitcoin at futures exchanges. This is what I do not understand.

The possibility of accepting this mystical asset does exist: the huge rewards of being supervised and trading liquidity will undoubtedly entice large sums of money to bet Bitcoin. Many funds bar the sale of "alternative assets" on unregulated exchanges, and now they will be able to participate.

And will have the opportunity to leverage leverage, which is more risky than your usual investment, to amplify what you already have, a very large return, which will almost certainly attract funds that require additional benefits.

But the truth is: Money will not flood the bitcoin market. It will be used to buy synthetic derivatives that will not directly affect bitcoin.

When a large hedge fund X invests 100 million US dollars (or other amount), there will be no additional capital flows into the Bitcoin market. These options do not need to have actual bitcoin, and do not even require the contract to expire.

Of course many will think that there are now more foundations interested in actually holding bitcoin because they can hedge these positions.

If oversized hedge fund X can offset any potential losses with futures trading, then maybe it will be more willing to buy bitcoin - though the potential gain from a futures transaction with the same cash settlement will be less. And why can holding Bitcoins earn similar profits at a lower initial cost than trading synthetic derivatives?

This is my most worried part. Why Buy Bitcoins When You Can Buy Long-Term Futures or Futures Contracts? Do you want to increase your potential profit or reduce your potential loss?

In other words, I'm worried that institutional investors will buy bitcoins for their potential benefits and then move on to cleaner, cheaper, safer and more regulated futures markets.


Even more worrying to me is that institutional foundations that have bought bitcoin (and pushed prices up to the present level) think the official futures market is safer. They will sell their bitcoin on it.

Demand for bitcoin futures and what seems to be widespread optimism now may push up futures prices (in other words, the promise of a contract to buy bitcoin for $ 20,000 a year will be greater than the commitment to buy for $ 12,000 - I know, but the market is weird).

This is likely to affect Bitcoin spot market prices ("the futures market knows we do not know, right?").

Bitcoin, meanwhile, is listed on a liquid futures exchange, raising the possibility that the Bitcoin ETF will be approved by the SEC in the near future. That will pour more capital into the already crowded space.

However, institutional investors may not be optimistic about the future of Bitcoin, and may use the futures market to invest short. Futures contracts that sell below market prices are much easier than making short bitcoin real. These investors may send a signal to the Bitcoin spot market that prices will fall.

The inherent leverage of futures contracts, especially those with cash-settled leverage, may increase volatility in price declines.

This is terrible.

Let us not discuss the changes that this development implies. The development of bitcoin in the futures market is more like a commodity than a currency (in the United States, the Commodity Futures Trading Commission manages the futures market). It is more like an investment asset than a technology that has the potential to change the financial order.
So the market seems to be warmly welcoming the two exchanges that launch bitcoin futures in the next two weeks (there are two other potential exchanges: Nasdaq, Tokyo Mercantile Exchange) and we should really put this Development is regarded as a new beginning.

It is considered as opening up a new path of future development.