The wait is over. The future is now! Thank you CME for bringing us *drumroll please* Bitcoin Futures! Now, this may seem like a contradiction, given the last article I wrote on Bitcoin. But it isn’t, and I’ll tell you why. You see, there’s a difference between a regulated Futures Contract, and a Spot Currency market. What are the differences? Continue on and find out.
Futures Market vs Spot Market
The difference between Futures and Spot essentially comes down to when the agreement is settled. A Futures Contract is an agreement that settles some time in the future, whereas in the Spot Market the agreement is settled “on the spot”.
However, the important difference between the two is that Futures are more regulated than Spot Markets. This would seem like a terrible thing, but it is actually great.
The fact that Futures are more regulated means that there is more transparency and trust in the product, when compared to Spot Markets.
Futures Exchanges Are More Regulated
This is one of the biggest advantages that Futures have. At the time of this article being written, the CME has just announced that Bitcoin Futures will be launched by the end of 2017.
At the present moment, the only way to trade Bitcoin is through cryptocurrency exchanges such as Bittrex and Poloniex, amongst others.
If you were to peruse through Reddit, you would find many Bitcoin traders complaining about how these shady exchanges operate. The CME has been around for over 100 years, and operates with strict federal and internal guidelines that are in the interest of the buyers and sellers they serve.
Any shady business going on at the exchange will surely be dealt with much more seriously and efficiently than these “bucket shops”, for lack of a better term.
Futures Provide Both Speculation And Hedging
I recently made the claim that Bitcoin is more similar to a commodity like gold, since it has a fixed supply like gold. A liquid derivative of Bitcoin would be an excellent instrument for people looking to both speculate and hedge their positions.
Right now, there is no good way to short Bitcoin. A derivative that is cash-settled (such as the new Bitcoin Futures) will allow for speculators and hedgers to go short the Bitcoin market, without having to take physical delivery of any Bitcoins.
You Need “Shorts” To Cover
There’s a lot of people who are Bitcoin fanatics, and if you try to tell them any differently they’ll call you an idiot (that’s a technical term). There’s also a lot of people who don’t like Bitcoin, or just flat-out don’t understand it.
Regardless, a two-way market is absolutely necessary for Bitcoin to last. Bitcoin, as it stands right now, is not an efficient two-way market. There’s no good way to short it.
Some people find the idea of shorting to be unpatriotic, evil, or manipulative. These same people haven’t a clue as to what they are talking about. Short selling is paramount to success in almost every asset. Why? It’s simple.
Short-Sellers Are The Real MVP’s
The market price is decided by the current amount of Bids and Offers placed in the market, and how many market orders are moving the Bids and Offers. A one way market (a market where you can only buy, and sell-to-close) doesn’t allow for healthy market corrections.
A two-way market does.
In other words, a mass amount of short-selling will push a market down if there are no bidders to step up and lift the offer. However, at some point all of those short-sellers are going to have to buy-to-cover at some point.
This is an important concept to understand, because there is limited risk as long as there are bids below the market price.
A market that descends into free fall that has no short-selling would indicate to a buyer that this Stock/Future/Bitcoin/Asset/Whatever is no good, because it would be an indication that Old-Longs are getting out of their position.
Now with a two-way market, this same scenario could be an indication of short-sellers suppressing a market by driving prices lower. In this same second scenario, even if a market descends into free fall, you know that shorts will need to cover their position at some point and that there will be a bounce to the upside.
To summarize: even though a market might be trading at all time highs, if there are no bids below the market to support the current trading level, prices will start to slip and fall. A one-way market that is in free fall doesn’t have the opportunity to recover, because everyone is running for the door at the same time.
With Bitcoin Futures, we will now have a regulated way to short Bitcoin.
Now let’s be clear, Bitcoin and Bitcoin Futures aren’t the exact same thing. The Futures are a derivative, and thus have no direct impact on the price of outright Bitcoins.
However, Bitcoin is worth whatever the next person is willing to pay for it. My hypothesis would be that the price of the Futures will have a reflexive relationship with outright Bitcoins and therefore influence the price of outright Bitcoins. Afterall, they’re called Futures for a reason.
But What About Blockchain?
Blockchain technology will still exist, don’t worry. In fact, the advantages of Bitcoin Futures (and probably more Crypto-Futures as time progresses) will probably strengthen the crypto market itself and blockchain along with it.
I think it’s important to realize though that Bitcoin Futures are in fact complementary to the Bitcoin ideology. Bitcoin Futures will most likely satisfy those that are Pro-Bitcoin as the regulated exchanges will provide a safe environment for trade to take place.
Moreover, Bitcoin Futures will also most likely satisfy the Bears as they will have a place to go short.
Anyhow, I hope this article was entertaining and thought provoking for you. If you have any questions or comments, or would like to continue the conversation, be sure to leave us a comment below.