What does this data mean?

Aside from saying that the futures market is small, I’d say that the bitcoin market is still well within the hands of its participants. What I mean is, bitcoins are still being traded by enthusiasts, regular people and entrepreneurs. If wallstreet, and ‘big finance’ are choosing to gain bitcoin exposure, they haven’t put significant amounts of cash into the bitcoin futures market. This means they are either staying away from bitcoin, or they have decided to buy real bitcoins, rather than look at the derivatives. Remember: if all things were equal, big banks would prefer to gain bitcoin exposure using the traditional derivatives market, because they already have a clear system in place for speculating on the futures market — It’s been their area of expertise for decades.

If wallstreet adapts towards the bitcoin exchanges rather than promotes growth on the futures exchange, then this is an implicit victory for cryptocurrencies. The CBOE’s descision to work with Gemini exchange, for example, can be seen as a sign that big finance and bitcoin entrepreneurs are willing to work together. More positively for the cryptosphere, is the launching of Michael Arrington’s 100 million$ hedge fund, that will be denominated in Ripple. However, it’s worth remembering that Arrington’s background is tech, rather than finance.

If wallstreet adapts towards the bitcoin exchanges rather than promotes growth on the futures exchanges, then this will be seen as an implicit victory for cryptocurrencies

If bitcoin futures continues their slow growth, then it will be at least a few months or even years before we being to pay attention to them. Perhaps they will not take over the bitcoin market as they have taken over the oil market. I had predicted this happening in my previous article. Given the slow rate of growth in volume traded, I may have to revise my opinion.

The future — Problems, solutions, growth and stagnation

I’m going to start by dealing with some problems with bitcoin futures. Bitcoin’s price volatility, for example, hasn’t yet translated well into the futures market. Whereas most seasoned bitcoin traders are used to daily 20%+ price fluctuations, derivatives traders generally haven’t seen such a high degree of volatility. This begs the question, are market circuit breakers a good thing for bitcoin? If the futures market shuts continuously due to volatility, then it’s a less efficient vehicle of speculation in comparison to traditional bitcoin markets. The traditional argument for circuit breakers, is it brings stability to markets, however, if the futures market comprises only 0.5% of total volume of BTC traded, it simply won’t have the size to influence bitcoin trades. Perhaps things will make more sense once the nascent futures market matures and grows its volumes.

Another issue is that bitcoin enthusiasts are used to trading bitcoin at all hours of the day, whereas traditional futures aren’t always accessible around the clock. The CBOE offering, for example is only open for a few hours a day, and thus will only appeal to traders living in America and perhaps Europe.

If the futures market shuts continuously due to volatility, then it’s a less efficient vehicle of speculation in comparison to traditional bitcoin markets

The best solution to both of these problems is simply to grow the futures market into relevance, something I’m waiting to see. Once that happens, the futures market can really add some stability to price swings, acting as a buffer to the chaotic swings that currently occur in BTC.

Also, whilst the CME futures contract is good in its role as a true hedge for physical bitcoins, its contract size is rather large. This is understandable given their targeting of the ‘institutional’ market. However, It’s well known that BTC price and speculation is immensely popular with amateur traders. I predict if the CME releases an “e-mini bitcoin” contract that’s 1/10th the size of its current contract it will attract much larger volumes as more amateur traders switch over to futures exchanges for their bitcoin speculation. Reasons for this are not within the scope of this article, but I will try to elaborate in an upcoming article.

I predict if the CME releases an “e-mini bitcoin” contract that’s 1/10th the size of its current contract it will attract much larger volumes as more amateur traders switch over to futures exchanges for their bitcoin speculation.

Furthermore, if the CME begins to see further growth of bitcoin futures we could begin to see bitcoin options on futures, which will add even more speculators to the market. Again, this should theoretically lower price swings, and further mature the bitcoin market.

Finally, what would also benefit BTC futures would be if other altcoins see derivatives released. Currently btc futures stand as the lone offering in the cryptocurrency asset class. If other cryptos could have their futures lauched, more hedgers and speculators would be attracted to participate.

All of these innovations can and will occur but only if bitcoin futures continue to grow. Growth is key to the continued finantialisation of the cryptosphere by traditional finance, and derivatives exchanges.