While once highly anticipated Bitcoin ETFs never materialized, at least on the U.S.-based stock exchanges, since December 2017 traders have access to another attractive tool for speculation, the Bitcoin Futures.
What are futures?
Futures, or futures contracts, are derivative financial contracts that detail the quantity of an underlying asset and oblige the parties to transact that asset at a predetermined future date and price. This means that the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of this asset’s market price at the expiration date.
In the world of traditional finance, those underlying assets may include physical commodities (crude oil, natural gas, corn etc.), currency and precious metals, and other financial instruments like U.S. Treasury bonds or S&P 500 Index.
What is the purpose of futures contracts?
Futures are mainly used for gaining speculative profit or to hedge the underlying asset’s price movement in order to prevent losses as a result of unfavorable price changes. By opening short or long positions, traders assume that the price of the stock will be either lower or higher in a set period of time (one month, three months, or one year) than it was on the day of purchasing the contract.
Using leverage
It’s a common practice for the futures markets to use high leverage. This means that traders don’t need to put up the entire value amount of the contract when entering into an agreement. Typically, the broker would require an initial margin amount representing a certain percentage of the total contract value.
Using leverage gives traders the opportunity to trade with borrowed capital and the ability to perform larger trades with a limited amount of money. However, this also means risk of losing the entire initial margin amount.
Futures settlement
The settlement for most futures contracts is typically carried out in two ways: cash settlement or physical delivery.
The cash settlement method does not involve the physical delivery of the assets. Instead it involves the settlement of net cash on the date of the contract expiration. The net cash amount is the difference between the spot price and the futures price of the underlying asset.
The physical delivery method is actually what futures contracts were originally designed to be, representing an instrument that binds to delivering the physical underlying commodity at a pre-determined quantity and grade at a pre-determined time and location. The process is coordinated in traditional financial markets via a clearing broker or a clearing agent, in crypto markets it’s directly coordinated by the exchange.
Bitcoin Futures
Bitcoin futures are futures contracts offering traders the ability to speculate on the price of Bitcoin using either cash settlement or physical delivery method and work literally the same way as any other futures contracts on the traditional financial market, with investors making a bet on the price of the cryptocurrency over a specified period. This means that one can either go long on BTC, expecting its price to go up, or short it, hedging potential losses if they actually hold some Bitcoin and the price goes down.
Where Bitcoin futures are traded
On December 10, 2017, the Chicago Board Options Exchange (CBOE) was the first major regulated exchange to launch Bitcoin futures under the ticker XBT, shortly after followed by Chicago Mercantile Exchange (CME).
Both CBOE and CME offered Bitcoin futures contracts settled in USD, allowing exposure to the largest cryptocurrency without actually having to hold any of it. However, in March 2019, CBOE decided to end the product offering when the last traded contracts would expire in June the same year, citing decreased demand for this particular instrument.
But nature always abhors a vacuum, and in September the same year the long-awaited Bakkt Bitcoin futures were launched:
We’re live!
— Bakkt (@Bakkt) September 23, 2019
The first Bakkt Bitcoin Futures trade was executed at 8:02pm ET at a price of $10,115
Bakkt is a crypto futures trading and custody platform backed by the Intercontinental Exchange (ICE), which is the operator of the New York Stock Exchange (NYSE). The main difference of Bakkt Bitcoin futures from the CME’s offering is that the derivative product of the former is physically settled, meaning buyers receive BTC at the contract expiration.
Another unique feature about Bakkt’s Bitcoin futures is that in addition to monthly contracts, the platform also offers a one-day version with bitcoins being delivered on the second business day after the contract expiration. Today CME and Bakkt are the two fully regulated and institution-oriented exchanges offering Bitcoin futures contracts, but investors have access to a broad selection of other derivative trading platforms as well. In fact, there are several dozens of them, including well-known names as BitMEX, FTX, Binance, and Deribit. Moreover, if you look at the trading volumes and open interest, you’ll find that CME and Bakkt are not even in the Top Ten.
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