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Just a week ago, the Chicago Board of Exchange (CBOE)) opened its doors to trading Bitcoin Futures (XBT), and wrapped it up with a 17% gain on the January deal. Its biggest rival, the Chicago Mercantile Exchange (CME) has just launched its own Bitcoin futures trading today. This has been pretty good news in the Bitcoin community, but many are still scratching their heads trying to make sense of it all. In this column, I try to explain what are the implications of these monumental events.

First, let's take a step back and define what is a futures contract. A futures contract is simply a contract of purchase or sale of a financial instrument or other underlying asset at a predetermined price in the future. They can be settled by the physical delivery of the underlying assets, or in cash

In other words, some speculates on the increase in the value of the asset under -jacent, and the other protects against the potential loss of value of it. The futures contract rewards the party that makes the most accurate prediction of the future value of the underlying asset.

Does this make sense?

So what does it mean for Bitcoin?

In the case of Bitcoin, a futures contract would allow two parties to speculate or hedge Bitcoin at some point in the future.

The important part of the above is the parts that would speculate or cover each other. Futures contracts are largely trade deals for experienced traders and institutional investors. By allowing these contracts to be traded on a regulated market, both CBOE and CME have opened the door to such traders to participate in the Bitcoin game and indirectly legitimize them as an asset class.

Keep in mind that because these contracts are settled in cash, the funds are not actually used to buy the underlying asset, but to speculate on its price movement. As such, the introduction of Bitcoin term trading does not necessarily directly improve Wall St.'s money-flow into Bitcoin, but one can expect to it has tangential effects. For example, a hedge fund that has previously refrained from adopting Bitcoin because of the lack of hedging tools might consider allocating it to its fund, using a series of futures contracts to hedge against downside risk.

In addition, Bitcoin futures should, in effect, reduce the volatility of Bitcoin prices, since speculation allows the market to be more efficient, leading to better price discovery. . With a reduction in massive price fluctuations, Bitcoin could become a more reliable currency backer, as the durability of its short-term prices increases its value for use – in simple terms, allowing two parties to trade in Bitcoin without have to worry. to be a very different price moments before or after the transaction.

In addition, the public acquires an additional insight into the combined market expectation of Bitcoin's future performance. Although futures forecasts are not always correct, they provide valuable data for traders and hodlers looking to understand the current market sentiment. At the time of writing this article, it seems that the January contracts (XBT / F8) put a premium on the current price of Bitcoin, just a month later. In fact, just like the futures markets opened for the first time, Bitcoin's Coinbase price jumped from $ 14,810 to $ 16,171 in a few minutes, showing that, despite a slight volume, futures prices could have a negative impact. effect on its underlying asset

Case manipulation

Despite the potential for huge benefits for the Bitcoin ecosystem, there may be some trade-offs. Bitcoin's markets are still immature compared to a well-regulated and proven equity market such as NYSE-ARCA or NASDAQ. Despite what appears to be a wholesome circulation of coins, currently in the order of $ 275 billion, futures have a mixed rate (CME refers to its Bitcoin or BRF benchmark rate). ), coming from a handful of exchanges. case of CBOE, a single exchange.

The problem with this is that these exchanges only exchange a fraction of the total traffic. Gemini's 24-hour Bitcoin volume accounted for only 1.6% of global Bitcoin trade. With such small volumes and a limited order book, the price of Bitcoin could be manipulated by a series of unscrupulous traders who are trying to move the market to obtain favorable execution on futures contracts. heavily indebted. Strategies that are illegal on a regulated exchange like the NASDAQ are fair game in the cryptocurrency markets. In addition, the Bitcoin market has become sensitive to media coverage; Even a single CEO of a globally recognized financial services company has proven itself to get the market moving using just a few words.

While it is hoped that futures operations help pave the way for a more regulated trading environment, we must not ignore the motive of speculators to make large sums of money. # 39; money. As the saying goes, "where there is a will, there is a way" and this has happened repeatedly in well-regulated US markets.

Final Thoughts

While Bitcoin's intention was to allow parties to trade "without going through a financial institution," the blessing of Wall Street and the US government could be a necessary evil to allow for more widespread use, the protection of the public, and ultimately more confidence by a wider range of investors. Bitcoin futures are an early case study that, if successful, could help prepare for the approval of ETFs and other investment vehicles, thus contributing to the growth of the market. # 39; ecosystem. If we are lucky, it creates a virtuous and self-sufficient circle of wealth creation, awareness and value.