Bitcoin Futures: СВОЕ vs CME

CME Group Bitcoin Futures will be settled based on the CME CF Bitcoin Reference Rate (BRR), which serves as the one-time base rate of the dollar price of bitcoin. From November 2016 года CME Group и Crypto Facilities Ltd. calculated and published BRR, which aggregates the trade flow of the major bitcoin spot exchanges at estimated time with the USD price per one bitcoin s 4:00 evenings (London Time). BRR is designed using IOSCO principles for financial benchmarks. bit stamp, GDAX, itBit and Kraken are composite exchanges, who are currently entering pricing data for the BRR calculation.

Chicago time is indicated everywhere

How Bitcoin futures work

A Bitcoin futures contract is a commitment to sell or buy a specified amount of bitcoins at a specified price prior to the expiration of the contract.

Guarantee provision, which is considered to be the futures price, can be just 10-15% of the transaction amount. In this case, the effect arises “Leverage”, and market participants have the opportunity to receive a relatively large income with small investments.

Derivative financial instruments are high-risk investments, since incorrectly predicting the price of the underlying asset, the market participant loses much more, what he originally invested in buying futures. The fulfillment of obligations under futures contracts is guaranteed by the exchange on the basis of legislation, within which she works.

Example:

Let's admit, the price of one bitcoin is $1 000. You, how trader, hoping to raise the price to $2 000, buy 10 bitcoin futures contracts by price $2 000 for a period of 2 months at 10% securing, leaving as security $2 000. Actually, you have acquired a commitment to buy 10 bitcoins at the market price at the time of contract expiration. The leverage in this case is 1000/200 = 5.

When the price is reached $2000 you sell contracts to another market participant, making a profit $2 000 in excess of the funds invested in the purchase, minus various fees and commissions, or leave contracts until the end of the term, if you think so, that the price will go even higher.

but, if within two months the price does not reach 2 000$, your contracts are automatically closed at the market price. Bad news: difference between strike price ($ 2 000) and the actual closing price of the trade is deducted from your collateral, that is, you risk losing 2 000$. Relatively good news: you will not lose any more collateral you deposited.

For the entire duration of the contract, you can buy or sell futures, moreover, their price may differ significantly from the price of the underlying asset. Depending on the price of the underlying asset in the futures contract and the price of the asset in the market, you can earn not only on the rise in prices, but also on their fall. Any price change, with the right approach and analysis, can bring income to a trader., as long as there are buyers and sellers of the futures contracts it needs on the market.

Major exchanges, such as CME, set a fairly high threshold for entering the market; smaller amounts can be traded, by concluding an agreement with one of the brokers. For example, in the specification for alleged bitcoin futures, The CME sets the value of one contract at 5 BTC (now it's about 40 000$). The minimum number of contracts for a transaction and the amount of collateral for the contract have not yet been established.

Impact of futures on the bitcoin exchange rate and market

Why do analysts think, that the emergence of bitcoin futures contracts will cause an increase in the price of bitcoin itself? Mainly, the matter is in the interest of large traditional financial institutions, acting exclusively within the framework of current legislation and having powerful analytical departments, which would not allow making decisions on the launch of Bitcoin futures, without calculating the financial, reputational and other risks.

The presence of bitcoin futures contracts on traditional exchanges will actually make the position of bitcoin "legal" in the existing financial and legal system. Bitcoin, and later, maybe, and other cryptocurrencies, become one of the world's most traded asset classes, taking a place among precious metals, energy resources, agricultural products, government bonds and many other goods and securities, on which futures contracts are concluded.

The fact of the availability of financial guarantees for transactions with bitcoin derivatives can undoubtedly increase the investment attractiveness, and hence the demand for the underlying asset and its price. This means, that global demand for bitcoin and market liquidity will increase significantly. Given the limited resource and predictable emissions “digital gold”, These factors should significantly increase the price and reduce its volatility at the same time. And this will make Bitcoin even more attractive for long-term investments..

but, any coin has two sides, and the release of bitcoin to “Adults” markets also carry significant risks for its future. After all, unlike classic trading, that is, direct exchange of bitcoins for dollars and other currencies, derivatives can move the price up, so and down. This opens up a wide scope for market manipulation and can not only raise, but also drop the price of bitcoin.

For example, if large traders on the same CME open contracts for billions of dollars to lower Bitcoin, then there will be panic on cryptocurrency exchanges and traders will begin to massively dump bitcoins, and there, where is margin trading open? – open “Short” deals, or “shorts”. This will cause a completely uncontrollable collapse in the price. – because bitcoin doesn't have “Bottom” and its participation in the real economy is extremely insignificant.

Despite the optimism of large bitcoin holders, Speculators, armed with derivatives and large reserves of liquidity, can easily collapse the price many times, even for a short time. And that means, that the introduction of bitcoin futures on major exchanges should be treated with caution and not expected to explode and continue to grow. Bitcoin has yet to gain a reputation among institutional investors.