Today is the day! Today CBOE will launch their Bitcoin Futures contracts at 6PM EST!

Most retail traders will NOT be trading futures since it is a very specific type of financial product that requires a certain type of familiarity to trade. That doesn't mean you should just ignore them because they will ultimately have a great impact on actual BTC price!

In my last blog this blog (What Are Bitcoin Futures?) I discussed what futures are and gave an example of how they worked. I would highly suggest reading that one before moving on to this one.

In this blog, I'm going to talk about who the main players of bitcoin futures are AND give a layout on the three possible outcomes

---

WHY CREATE BITCOIN FUTURES?

Bitcoin futures are the ONLY way for a large institution to enter the bitcoin market because futures contracts themselves limit the exposure to the actual underlying asset, bitcoin itself. This means that the futures market does NOT trade actual bitcoin, instead it trades cash based on the value of bitcoin. This is called a derivative since futures contracts derive their value from bitcoin.

Futures have 2 essential functions in a financial market.

1. To allow speculation on the actual asset, without having to own the actual asset.
2. To allow a large investor to hedge against actual bitcoin transactions. Hedging is a form of insurance where you pay a fee (the contract price) to cover the cost of your actual bitcoins if the value of bitcoin were to go down before the transaction is complete.

Both of these functions have vastly different consequences on the actual bitcoin market, we'll talk about both of them.

SPECULATORS JUST WANT LEVERAGE AND PROTECTION THROUGH A CENTRALIZED EXCHANGE

People who speculate on the price of bitcoin through purchasing the actual coin through an exchange will have to put up the actual cost of the coin itself. If the value goes up, they make money on a sale, if it goes down, they lose upon selling. The problem is if you cannot find a purchaser or buyer, you're stuck with the token until you decide to make a move on it.

There are pros and cons to owning the actual asset itself, but if you don't need to use the token for any reason, then futures markets might be a safer way to trade since the amount of money you can lose is fixed based on margin requirements, but the amount of money you can earn is unlimited. Speculators will also have the advantage of leverage.

CBOE futures will require 44% margin requirement, which means for each contract they intend on buying or selling, they will need to only put up 44% of the cost of the price of the contract instead of 100%.

Speculators trading futures will also be able to make money if bitcoin FALLS. This is a massive advantage for bitcoin futures traders because there was previously no way to make money on the downside of bitcoin because you cannot short bitcoin directly like a stock or option. Instead you short through selling futures contracts (see my link about how futures works to understand this).

FUTURES CONTRACTS AS A HEDGE/INSURANCE

This is by far the MOST important part of opening up BTC to the futures market!

This is how I see the benefit of a futures contract and how it legitimizes BTC.

If a bank wants to create a service for the financial sector where it can send hundreds of millions of dollars to another bank, it can do it several ways. One would be through the international Bank Wire system, which cost roughly $25-$75 and has a limit of around $100,000. Further the wire network does not operate past 2PM on fridays and all of the weekend. It also takes several hours for it to process because banks must authenticate the transaction internally.

Banks also physically deliver money at exchanges where cash moves from one value to another. This is a bank 3rd party, and is your 4th party member. All of these participants drive up the cost of transferring money. Bitcoin will remove this layer.

If a bank offers a bitcoin service instead, the person sending the money can do this at any time and transfer unlimited amounts. Currently if you pay the premium price for a BTC transfer, then you can push your transaction through within an hour. But during this time, the price of bitcoin can fluctuate which can cause millions of lost money depending on the size of the transfer.

Therefore if any bank wants to get in on the bitcoin train, the ONLY way for them to safely do so, is to purchase a futures contracts to hedge against the actual transaction. Since futures contracts are relatively cheap, it becomes a no brainer for the person initiating the transaction.

In terms of bitcoin exposure this is HIGHLY positive since it now creates a pathway for large institutions to use the bitcoin network.

THE UNKNOWN FACTOR

Here is the big unknown. There are a lot of bears in the fiat currency world that say BTC is a scam. They previously had no way to express their view on the BTC market place since you cannot short bitcoin at the moment.

When the futures market place opens up, there will be a way for these bears to express their view, but their view will be on a derivative market, not the actual BTC market.

The unknown factor is exactly how many bearish views will come from the creation of the futures market? How many people will flood the market with futures contracts for sale, thereby shorting it?

If the actual bitcoin markets looks at the futures contracts and sees that there are a significant number of people who have a bearish view on BTC, then actual BTC investors might be afraid and dump their BTC into the exchange. This is a massive unknown because many banks are actually preventing the trading of BTC futures upon opening. Many banks are going to wait and see how the market behaves before they allow their customers to trade futures!

HOW THE TWO MARKETS RELATE TO EACH OTHER

It is easy to say that the futures market has no effect on the actual price of the BTC market, but if you look deeper into how these two are intertwined, then you will see that that both markets must be in sync with each other. This is called the Law of One Price.

This law states that the value of an asset must be equal across different markets, after you take into account the cost of the market. So for example, the price of bitcoin on GDAX and BITTREX are usually different. Why cant you buy btc on bittrex and then sell on GDAX? The reason is that the cost to transfer, and the time it takes to process the transaction will prevent you from capturing the advantage of buying in one market and selling the other. This act is called arbitrage and is performed by people called arbitrageurs.

Arbitrageurs play an important role in markets because they allow the price of BTC and the futures to become one.

HOW WILL THE PRICE CONVERGE?

An arbitrageur will look for a futures contract that has one price, and look at bitcoin on another market that is selling for another price. They will then calculate the market prices for the transaction (the cost of the futures contract and the BTC transaction fee on the other) and see if there is a price difference in their advantage.

They can simultaneously

sell the futures contract and buy a bitcoin

or do the opposite

buy a futures contract and sell a bitcoin.

They might only make a few dollars on each leg of the transaction, but over a short period of time, the price of BTC and the futures contracts will converge, this is how the futures market can affect the bitcoin market. This is also why I have a bearish view on BTC for the short term.

Investors can push the price of BTC down in a massive campaign. And in doing so, they can suppress the price of BTC for their own benefit, OR they can use it to collect coins before the market eventually corrects to the upside.

Both cases are potentials and both are entirely possible.

What is your view? Comment below!!

Do you think BTC will nose dive because there will be many bearish views on the futures contract?

Do you think BTC is in for a long and overdue correction to the downside?

Do you think there will be a price suppression of BTC through the futures markets?

Do you plan on moving your BTC to altcoins?