How Bitcoin Futures Trading

How Bitcoin Futures Trading

Even though crypto futures are new to the market, futures contract trading dates back to ancient times. In 1750BC in Mesopotamia the Babylonian king, Hammurabi, introduced a legal code, which included stipulations for trading goods at a future date for an agreed-upon price.

A futures contract, in its simplest form, is an agreement to buy or sell an asset at a future date at an agreed-upon price. One party to the contract agrees to buy a given quantity of securities (such as stocks or bonds) or commodities (oil, gold, Bitcoin), and take the delivery on a future date while the other party agrees to deliver the asset.

Futures markets involve hedgers and speculators. Hedgers are concerned with protecting themselves from future price drops. Hedgers will buy or sell their commodity to lock in a price against future risks of it dropping in value. Speculators assume the risk, often borrowing a substantial amount of money to buy contracts that they hope will go up in the future. If the market moves against them, they will lose more than they invested.

One key requirement of futures contracts is that they must be traded on standardised exchanges such as the CBOE or CME. The arrival of Bitcoin futures at an established and well-regulated derivative exchange will encourage more investors to trade in digital currency, giving Bitcoin a place among mainstream finance. Even household names including Goldman Sachs have said they plan to clear Bitcoin futures on behalf of some clients.

This will fuel the cryptocurrency’s price rise, as crypto traders and dealers can hedge their positions based on the future market. For example Bitcoin miners will benefit from futures contracts as they can use them to hedge against their mining cost, getting money in advance from speculators hoping to make a future profit.

On the flip side, the launch of Bitcoin futures will attract greater scrutiny from the regulators which will cast a shadow on the fate of the Bitcoin in the long run. In this regard, the trade association for the futures markets, the Futures Industry Association warned the US regulator that not enough risk evaluation has been done on Bitcoin and the risks it poses to financial stability.

The launch of Bitcoin futures has aggravated other regulators, with scrutiny beginning to encircle the cryptocurrency. Hong Kong’s regulator issued a warning that only licensed firms can offer such products within Hong Kong. In Korea, the Financial Services Commission financial regulator issued a directive that bans securities firms from taking part in Bitcoin futures transactions.

Perhaps more worryingly, the levels of futures trading has not been as high as the initial flurry of excitement may suggest. The volume of trading since bitcoin’s launch on CBOE has been relatively low, especially compared with more established currencies futures.