What are Bitcoin Futures Contracts
A futures contract is a contract that comes into existence when two people agree to enter into it. They are created when new limit orders in the order book are filled.
As reported recently, many institutions and banks are increasingly interested in cryptocurrencies futures contracts as the Bitcoin prices sore.
Bitcoin futures contracts derive their value from Bitcoin and settle at price of the commodity in the future on a particular exchange or an index representing a basket of prices at different exchanges.
The profit and loss between counterparties in a Bitcoin Futures contract are very real although no actual bitcoins are being exchanged per se.
These futures contracts are traded with the help of an order book where people place buy and sell orders that can be fulfilled by other people. Exchanges that facilitate these order books charge some fees.
Futures contracts have a specific expiration date when they expire and one must re-open on the new contract period to maintain their position or to render the contract value for maybe another week. Different exchanges have different periodic dates (daily or weekly) when the contract period's profits are settled even if the contract has not expired.
There are two types of Bitcoin futures contracts, namely Quanto and Inverse. The majority are Inverse and are denominated in USD terms. This contract is an agreement between two traders to pay the other side an amount of bitcoin profit/loss as the price changes. Each side (Long and Short) places some portion of the contract value in margin.
Inverse helps maintain the contract value through price fluctuations and is therefore ideal for speculators and hedgers. In other words, it allows them to make a perfect USD-value hedge when they short with Bitcoin. For instance, if the BTC/USD value drops 1% they will earn more raw BTC than if it increases by 1%.
This is because the value of the USD value of the BTC is also falling with the value of BTC/USD so the payout adjusts and increases to compensate for the reduced USD value. Anyone is also allowed to realize the profit or loss before the expiration of the contract by fulfilling the buy and sell orders on the live order book, so no one is not forced to hold it to expiration.
Possible Effects of Bitcoin Futures Contracts on Bitcoin Prices
Much of the effects are speculation because much is yet to be realized about these futures contracts. Bitcoin has surged eight times in value this year to reach a price of over $8000 currently, which has made many banks to begin an interest in speculating on cryptocurrencies.
At the same time, CME announcements led to increases in Bitcoin prices.
Cryptocurrencies futures contracts might help spread the word about cryptocurrencies to more people in the banking world and increase usage of cryptocurrencies from a positive perspective.
Companies expected to launch Bitcoin Futures Contract
CME Group Inc, world's biggest futures exchange, has said that it hopes to launch a Bitcoin futures contract this year.
CME had posted date of December 10 but later removed the dates, saying that it had been posted in error, although it still insists on launching the contract this year. The company is still working with regulator -- which is U.S. Commodity Futures Trading Commission -- on the same but has not yet filed a written self-certification with the regulator.
Any company can list products for trading without prior CFTC approval by filing the self-certification.
CME will not allow the futures to trade at prices 20 percent above or below the settlement price from the previous day according to their website.
Cboe Global Markets is also planning to launch the Bitcoin futures as the first Bitcoin-related financial product on a traditional, regulated exchange. The company said this would be the first step to launching an exchange-traded fund based on bitcoin prices.
TradeStation a Monex Group and online broker-dealer and futures commission merchants have said it will let clients trade the new Bitcoin futures contracts once they are launched by CME Group (CME) and Cboe Global Markets (Cboe Futures Exchange).
JPMorgan Chase is also reportedly weighing on letting its clients trade CME Bitcoin futures. Currently, JPMorgan allows clients some access to bitcoin through an exchange-traded note, namely routing their orders to exchanges.
Read more about Bitcoin futures contracts here.