What You Need to Know About Bitcoin Futures

Bitcoin futures are coming.

CME Group Inc. [NASDAQ:CME], which operates the Chicago Mercantile Exchange, is set to launch bitcoin futures in the fourth quarter of 2017.

Due to its popularity, it’s clearly a no brainer. As CME CEO Terry Duffy said:

Given increasing client interest in the evolving cryptocurrency markets, we have decided to introduce a bitcoin futures contract.

As the world’s largest regulated FX marketplace, CME Group is the natural home for this new vehicle that will provide investors with transparency, price discovery and risk transfer capabilities.

What Does This All Mean?

Well, for one, it gives institutional investors exposure to the price of bitcoin without having to hold the cryptocurrency. Because of regulatory presence, institutions might also be more comfortable betting on the price of bitcoin.

Bitcoin futures will also help traders predict future prices. Just like any other futures, if long-dated contracts are significantly lower/higher than the current price, then investors will believe that prices, over time, will trade lower/higher.

But there is a key difference between bitcoin futures and, say, oil futures.

When you buy oil futures and hold until the contract expires, you’ve accepted to take physical delivery. That means someone will put barrels of oil on a truck and drive them to your house.

This is why traders almost never hold until the contract expires. But investors, on the other hand, who have bought future contracts as a hedge, might sometimes accept delivery.

When it comes to bitcoin futures, CME will be settling in cash. That means, instead of receiving bitcoins, you’ll receive the cash equivalent.

It seems rather silly, doesn’t it? The one asset that’s extremely easy to transfer and store is not being physically delivered.

This might not faze some traders, who only want to make a quick buck. But for investors in bitcoin wanting to own the asset, you’re better off just buying bitcoin itself.

Why Won’t CME Physically Deliver Bitcoin?

As Bloomberg View columnist Matt Levine explains:

‘…handling bitcoins is mostly terrible.

The fate of every bitcoin exchange, I often say around here, is to have its bitcoins stolen, so CME is quite sensibly launching a bitcoin exchange without any bitcoins to be stolen. 

Individuals and institutions who handle bitcoins, meanwhile, have been reduced to writing their private keys on scraps of paper and putting those scraps of paper in safe deposit boxes.

Bitcoin futures aren’t for retail investors. They’re for the big-money players that are too scared to buy the coins themselves, but also too greedy to resist the explosive returns.


Härje Ronngard,

Junior Analyst, Money Morning

PS: Want to find out more about the secret world of bitcoin? Click here.

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