Bitcoin Futures Contract: What is about?


A couple months ago, the two most reputable, regulated and liquid exchanges CME (Chicago Mercantile Exchange) and CBOE (Chicago Board Options Exchange) launched the Bitcoin Futures contract.

The first exchange that launched its own Bitcoin futures contract was CBOE on Dec. 10 which expired on Jan.17.

Just a week after, on Dec. 17 to be specific. CME, the world’s leading derivatives exchange, launched its market of Bitcoin futures contract which expired on Jan.26.

  • Each CBOE contract represents 1 BTC, under the ticker XBT.
  • Each CME contract represents 5 BTC, under the ticker BTC.

NASDAQ, second largest exchange in the world, is considering to launch the same product for the second-half of 2018.

Banks like Swiss bank and brokerage firms like TD Ameritrade and JP Morgan, also expressed their interest to allow betting on Bitcoin futures.

What are Futures contracts ?

Futures contracts (colloquially, futures) are an agreement between two parties-buyer and seller-to buy or sell an asset at a specific price for a future delivery date.

Historically, the futures have been around for decades and were first focused on agricultural commodities and later futures contracts were negotiated for natural resources (e.g. Oil) and precious metals (e.g. gold) .Only in recent decades financial futures for currency and stock were introduced on futures exchanges.

Taking the example of agriculture market, from where the concept raised. Here is a well-crafted story, but first, take into consideration that current prices change daily.  The producer (the farmer) wants to sell his product at a high price. However, the end user wants to buy at low price. But, over time and when the commodity is harvested and ready for sale, change in prices may not play in the favor of one of the two parties. To protect themselves against the fluctuation of prices, both the farmer and the end user use futures contracts to lock in prices. This means, when a future contract is issued, the commodity is traded at a predetermined price rather than at the spot price in the market at the delivery date.

 Long and short position

It said you take a long position (go long) when you agree now to buy an asset at a specific price to be delivered in the future (when contract expires).

It said you take a short position (go short) when you agree now to sell an asset at a specific price to be delivered in the future (when contract expires).

 Hedging and speculation

First, futures were designed to hedge against the price change in the market. But while the producer and the end user continue to use futures as a management risk tool, investors and traders of all types use futures contracts for speculation purpose to generate profit by betting on the price of underlying commodities.

What is of interest in this article is speculation. Let’s dive into it:

 Anticipating a rise in assets’ price, investors who speculate buy futures at an agreed price. As prices increase, the contracts become more valuable and can be sold to other traders at higher prices  when they expire or even before expiration date.

Expecting prices to go down, speculators sell futures at a specific price. So, as prices fall, the contracts become more valuable and are bought from other investors at lower prices when they expire or even before expiration date.

For both investors, profit generated from the difference between the futures price (the agreed price) and the spot price (current market price).

Physical delivery and Cash settlement

Settlement refers to how futures contracts are consumed at maturity date. You can go in one of two settlement ways:

Physical delivery: occurs when the amount of the underlined asset is delivered by the seller.

Cash settlement: The seller does not deliver the underlying asset. Instead, a cash payment occurs.

What are Bitcoin Futures?

Bitcoin futures will work on exactly the same principles as futures on traditional financial assets.

Bitcoin futures market will be cash settled and this imply that at the end of the contract, Bitcoin will be delivered on cash basis rather than the actual Bitcoin. Thus, may cause Bitcoin Futures market to be larger than the regular Bitcoin market, as investors may trade without having the cryptocurrency itself.

In other hand, Bitcoin futures are now traded in two regulated exchanges CME and CBOE.So, institutional and retail investors who were not able to trade Bitcoin because of strict regulations and risk aversion can now expose to Bitcoin.

All in all, for the last 10 years, Bitcoin’s value went over the roof from being a fringe asset to the global major topic of interest and investment. And the launch of the Bitcoin futures by the regulated exchanges CME and CBOE, can be seen as paving the way forward legitimating the underlying cryptocurrency.

But, a major concern which cannot be neglected is that Bitcoin enthusiasts and experts fear that Bitcoin futures will be open for price manipulation. If, as said earlier, Bitcoin Futures exchanges will be larger than actual Bitcoin exchanges, this may result the latter to follow the Bitcoin futures market. As investors are given the option to take short or long positions, they can easily make under control this cryptocurrency market, which is the most worrying scenario that may happens.



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