Bitcoin futures are here. This week, the Chicago Board Options Exchange (CBOE) launched bitcoin futures on its exchange for trading. Next week, on 18 December, CME Group, a derivatives marketplace, will launch bitcoin futures contracts. The bitcoin futures are cash-settled contracts that settle to a single, tradable auction price. Bitcoin futures listed on CBOE are based on the cryptocurrency’s prices listed on the Gemini bitcoin exchange. These futures on this exchange are traded in dollars. The contract multiplier is one bitcoin. The trading currently expires in January, February and March.
The soon-to-be-launched bitcoin futures on CME will also be cash-settled. The underlying price will be based on the CME CF Bitcoin Reference Rate (BRR)—it serves as a once-a-day reference rate of the US dollar price of bitcoin. Since November 2016, CME Group and Crypto Facilities Ltd. have been calculating and publishing the BRR, which aggregates the trade flow of major bitcoin spot exchanges during a calculation window into the US dollar price of one bitcoin, as of 4:00 pm London time.
Here’s a closer look at bitcoin futures.
Bitcoin futures
Futures are derivatives—financial securities that depend on the value of an underlying asset and the expectation on the future price trend. Futures are priced as per the underlying security. In a futures contract, when you buy something, you buy it with a promise to pay at a future date. And when you sell something, you have to deliver it to a buyer at a future date. The future dates are pre-decided. However, you don’t actually exchange the physical product. Instead, you settle the cash against the value of the contract. Short-term futures tend to see higher trading and can be for a period of 1 month, 3 months and so on, while long-term futures can be defined for 1-3 years. Similarly, in the case of bitcoin futures, the underlying asset is the bitcoin price and there is no actual buying and selling.
Here is how it works: For example, as on 13 December, a bitcoin futures was valued at $18,000 for a contract ending on 14 March, $17,700 for 14 February, and $17,630 for 17 January. The value of bitcoin, as on 13 December, on the Gemini exchange was $17,064. These numbers indicate that the bitcoin futures reflect a positive sentiment. It is an expectation that the price will be up when the contract expires. As one gets closer to the expiry date, the cash market price and the future price tend to get closer. Those who are buying futures contracts usually have a positive view and those who are selling have the opposite outlook. In futures, both the buyer and the seller have an obligation to complete the trade at the end of the contract by settling in cash. This is risky since the price can move against your expectation but the obligation to settle remains. Moreover, since you can take a large exposure by only paying a small amount as margin money, it can get difficult to settle if you lose money.
Can you trade in futures from India?
You can’t do a bitcoin futures trade in India. “There is speculation about a possible entry of companies (exchanges) into the market; however, I don’t foresee anything coming soon to India,” said Sreekanth C.S., chief operating officer, Coinome, a BillDesk-backed cryptocurrency exchange. “For futures to come about, a higher level of regulation is required. Since futures is a predictive market, there is a need for strong counter-party protection. (Bitcoin) futures might come after there is positive regulation from the government,” he added.
As far as the impact of the futures on bitcoins is concerned, experts expect slower price movements.