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What's Next For Bitcoin Futures

Apr 20, 2018
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By now you may have heard about the monumental step in the exciting world of cryptocurrency – Bitcoin futures contracts are easily accessible to investors in a regulated exchange environment!

The move by global futures giants, CME Group and Cboe Global Markets, signifies an impressive victory in legitimizing cryptocurrencies by opening up Bitcoin futures trading and allowing market access from all over the world. Now, traders don’t need to worry about cold-encryption storage, cybersecurity risks associated with Bitcoin, or unregulated exchanges. CME and Cboe’s derivative contracts give traders a regulated product with a price based on expectations of physical Bitcoin prices, without the hassle of actually owning Bitcoins.

Bitcoin Futures Launch in Chicago
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Cboe was the first CFTC-regulated derivatives exchange to officially launch Bitcoin futures on December 10, 2017. Enthusiasm was so high on Cboe’s launch date that prices rallied 19% and exchange circuit breakers halted trading twice. Twenty firms participated in the launch, which granted physical Bitcoin miners an opportunity to hedge their holdings for the first time. Bitcoin miners use software to find keys that unlock access to new Bitcoins. If this key and the transaction are verified, the miner is rewarded for their work with the issuance of 25 new Bitcoins. These new futures products enable miners to lock-in future Bitcoin prices with contracts at Cboe and CME.

When Bitcoin futures launched at CME group, trading was less volatile even though the contract surprised many by opening above $20,000. The main difference between the two contracts is that the contract size at Cboe is 1 Bitcoin while CME’s contract is for 5 Bitcoins. In terms of volume, CME bitcoin futures monthly volume for March was 54,410 contracts while Cboe bitcoin futures monthly volume for March was 153,258 contracts. When one takes into consideration the contract multiplier, CME bitcoin futures seem to be the prevailing option in terms of volume traded. The Cboe settles against a daily price auction from the Gemini Exchange while CME Group’s product tracks several cryptocurrency exchanges.

At the Cboe, the smaller contract multiplier allows trader with less capital an opportunity to participate in Bitcoin futures in smaller increments while the CME contract gives Bitcoin traders more leverage with a larger contract size. Due to the differences in contract size, traders could expect the Cboe contract to be utilized more by Bitcoin miners and individual traders, while the CME contract could attract institutional-level market participants.

With more than 36 cryptocurrency exchanges closing to date, there are several benefits to a central clearinghouse like Cboe and CME for trading Bitcoin futures products. Clearinghouses protect individuals by making sure contract obligations are met by fully compensating counterparties when the other fails to deliver.

Furthermore, since Bitcoin is a transnational product, some jurisdictions that trade Bitcoin are unregulated or have been fined by US regulators. Others have gone bankrupt such as the case of Mt. Gox. Fortunately, for traders at the Cboe and CME, the Commodity Futures Trading Commission (CFTC) regulates US-based futures exchanges and works to protect market participants and investors from manipulation and fraud.

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Straits is a member, and provides access, for clients to both exchanges. In order to provide the best service and education for our clients, we recently held an exclusive event with the Gemini Exchange and its founders - Tyler and Cameron Winklevoss. Gemini is a digital asset exchange that acts as a custodian for Bitcoin. They have fiduciary responsibilities and compliance requirements that make them one of the most regulated Bitcoin operators in the country. Keep an eye on www.straitsfinancial.com/us for our next Bitcoin event!

Bitcoin Volatility and Scarcity of Bitcoins

Unfortunately, for those long, the world’s most liquid coin had a historic moment followed by an avalanche of downticks in the weeks that followed. Given the markets new ability to short Bitcoin, coupled with serious pressure from headlines, traders witnessed a dramatic price reversal and Bitcoin’s value was cut in half. Many are scratching their heads wondering what is next.

Market participants have made a wide array of market predictions for Bitcoin this year, some calling for prices to reach the $25,000 and $40,000 levels. This bullish thesis is based on the limited amount of Bitcoin available, the value of the underlying technology, and investor demand as Bitcoin becomes more accessible.

Major governments banning and removing cryptocurrencies was a key concern for Bitcoin traders and a headline that was generating a lot of volatility. Some other key sources of volatility have been announcements regarding large position selling or buying, trading bans in cryptocurrency at brokerage firms, and banning of digital crypto advertisements.

As noted, the launch of Bitcoin futures provides access to a trading venue with more security than new cryptocurrency exchanges on islands far away. Traders expect to see less volatile price moves as Bitcoin futures pricing become more dominant and potentially take over forward price indicators for physical Bitcoins. As volumes keep growing, Bitcoin futures will most likely be followed by options and even more traders will participate. Furthermore, prices should start to reflect fundamentals like supply and demand as sophisticated traders participate and people realize Bitcoin is here to stay and has limited inventory. This will become more apparent as the masses adopt Bitcoin on a larger scale for daily transactions.

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We hope you enjoyed this exclusive report on Bitcoin futures. As a global team of futures trading specialists, we invite you to gain exposure to the cryptocurrency market in a regulated environment. With your account at Straits, crypto is just a click away. There’s no need to open additional accounts with us to access Bitcoin futures. Traditional financial companies can avoid cold wallets and cybersecurity costs by choosing to trade Bitcoin futures in this regulated space with their account at Straits Financial. We arm our clients with the best global trading access with offices in the US, Singapore, Hong Kong, Jakarta, and Shanghai. Write us at info@straitsfinancial.com to get in touch with one of our trading specialists.

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