What’s the future of Bitcoin futures?

If you thought the world of bitcoin was crazy enough, you’re in for another surprise. In mid December two of the largest derivatives exchanges, CME and CBOE, launched bitcoin futures, extending some credibility to an asset that many in the financial industry have criticized as fraudulent. While both exchanges are well-trusted in the financial community, there are some notable differences between each of their futures contracts that may tip you towards trading on or the other.

One of these differences has to do with the way these exchanges calculate the price of bitcoin. Because of bitcoin’s decentralized nature, there is not central entity like a country or exchange to regulate the price of bitcoin. As a consequence, the price of bitcoin is determined by supply and demand and will vary from exchange to exchange. The supply and demand of each exchange varies, and so does the price bitcoin can be traded for on that exchange.

This leaves CME and CBOE with a tough question – how to determine the price of the bitcoin underlying their futures contracts. Each company has taken a different approach to this question. CME takes the average price of bitcoin on 4 of the most prominent exchanges: itBit, GDAX, Kraken, and Bitstamp. This average price is referred to as the Bitcoin Reference Rate (BRR). On the other hand, CBOE uses only Gemini, a virtual currency exchange created by the Winklevoss twins, to determine the price of bitcoin. While this may not seem like a big deal (and perhaps it isn’t), some have lauded CME for providing a research paper on how they calculate the value of bitcoin and have expressed skepticism at CBOE’s use of only one exchange without research to backup why they feel this most accurately represents the true market value of bitcoin.

img2Source : Bitcoin

CME will allow a single investor to control a position of no more than 1,000 contracts. Compare this to CBOE’s promise to allow a single entity to control up to 5,000 futures contracts. While it may seem that CBOE allows an investor to take larger bets, this is actually not the case. A single CME contract represents 5 bitcoins, while a single CBOE contract represents just one bitcoin. So, no matter which one you choose, the maximum number of bitcoins represented by the contracts is 5,000.

One similarity between the two futures is that both are cash settled. Normally, the commodity underlying the futures contract is delivered on a pre-set date. However, for undeliverable commodities (weather, etc.), the futures is said to be cash settled. This means that any profits or losses made as a result of the futures will involve a transfer or cash, not a transfer of bitcoin. This serves as a huge relief to institutional investors on Wall Street, who still are not sure how to hold bitcoins and cryptocurrency in a safe way.

So what’s the big deal about bitcoin futures? Well, investors believe that the introduction of bitcoin futures will open the door of cryptocurrency trading to a whole new investor pool that was previously cautious about dipping their feets into what many seen as a volatile and still emerging technology. In fact, after CME first announced on October 31, 2017 they would be launching bitcoin futures, the price surged. As a of writing (January 3, 2018) the price has risen more than 300% of the announcement in late October. Wall Street heavyweights like Interactive Brokers and Wedbush futures partook in the frenzy of trading that enveloped bitcoin futures during launch. A plethora of “crypto funds” have emerged that focus only on investing in cryptocurrencies. Recently, brokerage TD ameritrade has announced that they would allow select customers to invest in CBOE bitcoin futures, with support for CME futures potentially coming at a later date. Peer brokerage E-Trade already supports both CBOE and CME futures. The introduction of so many new investors to the market is going to increase demand, driving up the price of bitcoin to even new highs.

img2Source : Bitcoin

Despite the hype surrounding these derivative products, some have called these futures anticlimactic. They point to low open interest in the contracts and low trading volume, indication that the new pool of investors supposedly entering the bitcoin market is more of a puddle than an ocean.

Interested in getting in on the action? Check out our guide on the easiest way to get bitcoins. And hey, if bitcoin seems to mainstream for you, check out our list on other cryptocurrencies that may offer more bang for your buck.


Updated September 13, 2020

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