Bitcoin is emerging unscathed from its first morning on the American futures market.
Listed on the Chicago Board Options Exchange, the world watched on with clenched jaws as the market opened.
At time of writing, the digital asset is up by 10% on its 24-hour price, and the signals are trending upward.
What is futures trading?
A futures contract, put simply, is an agreement to buy or sell an asset at a future date, at an agreed-upon price.
Let’s say Peter thinks that the price of XYZ, which is currently trading at $50, will go up to $100 in two months.
Pauline offers Peter the chance to commit to paying $80 for XYZ in two months’ time. Peter accepts which means that he’s just ‘bought’ a futures contract. Pauline has, in effect, ‘sold’ a futures contract.
If Peter is right he will be paying $80 for something that’s worth $100. A bargain.
If he’s wrong, and the price is lower, then he’ll be paying more than what it’s worth in the market. A bad result, clearly.
This is the basic premise, but derivative markets can be complex.
For example, the futures market of gold is 10-times the size of the actual physical commodity market for gold.
This is because most futures contracts are settled with cash, not physical delivery of the traded commodity.
At this stage, bitcoin futures will be no different. They’ll be settled with cash, not actual bitcoin.
So it’s likely that the bitcoin futures market will end up being even larger than the bitcoin market itself.
As of today, the bitcoin market cap is US$261 billion.
How will this affect the bitcoin price?
First things first, this is a separate market. For that reason it will not affect the price of bitcoin directly.
Prices go up if more people want to buy the commodity than people want to sell it.
In other words, the market cap of the commodity divided by how many units exist.
The futures market will not change the market cap of bitcoin, as investors are not actually buying bitcoin.
They are making future predictions, without holding the digital asset as an investment.
Why is this so important then?
This is important, because it introduces institutional money into the bitcoin ‘conversation’. It introduces Wall Street speculation, without them actually needing to own it.
The whole world is fascinated by bitcoin. But most are still apprehensive.
This offers an opportunity for people to enter the market and learn more about its famed volatility without actually buying bitcoin through an exchange.
The fact that they can use large banks to buy and sell these future contracts simplifies these first steps into a new market.
Other commonly traded futures commodities include crude oil, gold, copper and silver.
Is this good or bad for bitcoin?
Undoubtedly good. But that doesn’t mean it won’t be a bumpy ride.
However, moving into the futures market elevates bitcoin to an ‘emerging asset’ class.
A big part of adoption, of course, is the ‘validation’ that it is trusted by the market.
This goes a long way toward achieving that. At least, that’s the opinion of Nikolaos Panigirtzoglou, a global markets strategist at JPMorgan:
‘The prospective launch of bitcoin futures contracts by established exchanges in particular has the potential to add legitimacy and thus increase the appeal of the cryptocurrency market to both retail and institutional investors.’
The official line from CBOE is that interest has been immense.
I think this a monumental day.
I will be enjoying this show from the sideline — and for the moment my bitcoin-enthusiast jaw is relaxed and unclenched.
Junior Analyst, Money Morning
PS: Want to find out more about the secret world of bitcoin? Click here.