The new Bitcoin forks became a sensitive issue after CME launched future Bitcoin contracts. Their average price does not include new products because CME does not have a fork policy yet.

Since its creation by Satoshi Nakamoto nine years ago, Bitcoin has generated polarized attitudes. Supporters believe that Bitcoin is heralding a new era in human civilization, as leaders of established financial institutions call it a bubble and predict that cryptocurrencies "will almost end with certainty," said billionaire Berkshire Hathaway, Warren Buffett. 10.

What are the futures for

One of the reasons why financial executives are perplexed might be that Bitcoin is a retail phenomenon and has not been initiated by Financial clusters, but was invented by a mysterious programmer who allowed the peer-to-peer transition of financial assets by bypassing the institutions that monopolized this feature for hundreds of years. Governments generally regulate these institutions fairly heavily to prevent the abuse of their status and because of this regulation, it is almost insurmountable the obstacles to the holding and trading of Bitcoin and other cryptocurrencies that are now relatively freely traded by private individuals. In particular, institutional investors often negotiate not the underlying assets, but only a derivative on that asset and delegate regulations to a central authority such as clearing houses to settle these derivatives. This type of trade occurs in the trading area, where the contracts on a barrel of oil are futures contracts (the shortest being for a month). These contracts are essentially what determines oil prices and ultimately the price of gas we pay at the pump.

To mitigate the situation and give institutional investors access to Bitcoin, CME introduced the Bitcoin Futures contract on December 17, 2017. Of course, the introduction of Bitcoin futures contracts had other goals. "This is a very important step for the history of Bitcoin … We will regulate, make bitcoin non-wild, nor wild.We will tame it as a regular trading instrument with rules", said Leo Melamed, president emeritus of CME group

However, futures allow institutional investors to bypass much more effectively and thus create an alternative.Bitcoin carries to express his point of view by selling futures and using this Bitcoin shortcoin.In addition, the futures contract contains backups against the big daily price variations.

<img alt=" BTC Returns 10/13 / 2017-1 / 16/2018 "src = "https://cointelegraph.com/storage/uploads/view/da477b4d25fbcf71c19366f5c70b4802.png" title = "Returns BTC 10/13 / 2017-1 / 16/2018" />

It is interesting to compare the Bitcoin volatility before and after the introduction ction of futures. was annualized at 37% two months before the launch of the futures contract, compared to 44% in the last month of the launch of the futures contract, so that Bitcoin's volatility has not changed much during this period

Of course, there is still a short time since the futures contracts were launched and it will be interesting to see if he will tame the volatility of Bitcoin as some financial executives did. hope and make Bitcoin more acceptable as an asset for banks and other financial institutions. I am personally convinced that the exchange houses are sufficiently experienced to manage the daily volatility of Bitcoin and put in place enough checks and balances of backup to avoid any risk for the clearing house itself. even when she handles Bitcoin settlement issues. It seems that bitcoins have prevailed since futures contracts were launched.

Another interesting feature of futures is that they are settled in cash rather than delivering real bitcoins. While it is natural to expect this to happen because of the effort to establish Bitcoin portfolios and physically exchange them, we will see very soon that this creates Other problems that imply another feature of Bitcoin being essentially a software product, which are ranges.

Consider for a moment a future on a stock paying a dividend or an obligation. The clearing house settles futures, including not only its price, but also any potential dividend or interest paid on a bond. The similar thing happens with a stock split or a merger event during future active trading. The clearing house will adjust the price of the future for a merger or split and will settle the claim accordingly.

New Family Members

The fork takes place when the bitcoin code is changed and whoever bitcoin owner at that particular time adds with another cryptocurrency that is his offspring. This is similar to a family situation when a new child is born and becomes a family member immediately.

However, the average price of Bitcoin does not reflect these new members of the Bitcoin family. Consider for example the two major Bitcoin divisions in BCH (Bitcoin Cash) and BTG (Bitcoin Gold) Bitcoin owners eventually own these new currencies. But the Bitcoin index does not incorporate the price of these two currencies into its price action. Thus, people who buy futures contracts will lose those potential gains that Bitcoin holders would have earned if the range had occurred when the futures contract began trading. The same thing happens with a process called air pump where a new crypto asset takes its genesis block to be a certain block in the bitcoin blockchain. In this case, the owners of Bitcoin immediately have this new piece that was dropped on their lap.

There will be many Bitcoin forks in the near future. Certain forks and air drops occur during the launch of futures contracts and must therefore be considered in the forward contract. Note that there would be no problems like this if Bitcoin futures were physically settled. Indeed, just buy Bitcoin at the time of creation of the contract and physically deliver them to the buyer of the contract at the time of creation. Any drops or forks occurring during the futures contract would automatically be transferred to the future buyer with physical Bitcoin.

Which fork is viable

CME is aware of the problem but does not seem to have any well defined strategy for dealing with this problem. Namely, we read on the CME FAQ page:

"CME is developing a strict range policy to capture the spot market exposure in response to The policy may involve cash adjustments for position holders or quotation-related futures contracts that are also issued to the holders of positions. "

Not known at all what the viable fork means The physical owners of Bitcoin will appreciate these ranges and it will be their decision and not their clearing house, whether or not they want these additional coins.

The failure of clearing houses to incorporate forks can lead to fiduciary conflicts once future holders of Bitcoin have realized that these potential ranges are not accounted for in future settlement practices ( as this creates an unfair advantage for future Bitcoin and will lead to arbitrage opportunities).

The Question of Forks and Futures to Unexpected Developments for Future Bitcoin Traders These questions highlight the unique characteristics of Bitcoin as a financial product and show the challenges that regular financial institutions face in their crusade to tame and regulate Bitcoin.

Yaacov Kopeliovich

Adjunct Professor in Residence Department of Finance at the University of Connecticut

His previous experience includes senior research positions and Senior Risk Analyst at Risk and Asset Management Companies.