What Will Bitcoin Futures Do to Bitcoin?

It begins. Bitcoin futures will launch today.

Leading up to the launch, bitcoin has streaked up past US$15,000. It represents a 1,433% climb year-to-date.

bitcoin price

Source: Coin Desk

What will futures mean for bitcoin?

It’s hard to say.

Future contracts are just derivatives of an underlying asset. The purpose of oil futures, for example, is to allow buyers and sellers to lock in a price at a specific date in the future.

It helps airlines lock in the price of oil they receive within a three month period. It can also reduce the risk of oil prices rising or falling in the short term.

But not all participants buy and sell futures to receive or deliver something at a future date. A lot are just there to trade the volatility.

Unlike oil futures, bitcoin futures are cash settled. This means if you buy a bitcoin futures contract and hold until delivery date, you will receive a cash equivalent of the value in bitcoin, not the actual bitcoin.

Will bitcoin price become more volatile?

As you can imagine, the market will be full of traders, all betting on the bitcoin price swings. So will bitcoin be even more volatile as traders try to profit from big swings and dips?

Maybe. To be honest, I have no idea.

A futures market usually gives investors an idea of what prices might look like in the future. But with such volatile assets, the market might swing and dip before finally coming to a consensus.

Then again, the market might become less volatile.

According to the Sydney Morning Herald, the Chicago Mercantile Exchange (CME) will forcibly limit volatility.

In a bid to curtail volatility, CME’s futures contracts have price limits of 20 per cent above or below bitcoin’s reference point, which mean traders are unable to capitalise on swings greater than that.

Cboe halts trading for two minutes if prices rise or fall 10 per cent, and a five-minute halt kicks in at 20 per cent.

But dramatic price swings of more than 20 per cent have become relatively commonplace in recent months.

Further compounding volatility risks is the concentration of bitcoin ownership; the top 100 wallet holders control 40 per cent of all available bitcoins.

Should these large investors — sometimes referred to as whales — move a sizeable holding, this often causes widespread ructions throughout the market.

Cheers,

Härje Ronngard,

Junior Analyst, Money Morning

PS: Want to find out more about the secret world of bitcoin, click here.


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