Bitcoin To Begin Trading “Futures” On Derivatives Exchange

This week, supporters of cryptocurrency trading have much to celebrate. That is, Bitcoin took a huge step forward on Tuesday, as the world’s largest derivatives exchange (where investors currently take bets on commodities such as gold and oil) announced that it will launch Bitcoin futures contracts before the end of the year.


Futures contracts, or “futures”, are agreements to buy and sell an asset at a certain price at a future date, giving investors greater flexibility when investing and mitigating risk. For instance, an airline may opt to buy oil futures that allow it to buy the fuel next year at a price already agreed upon, to the end of better predicting its costs. In this way, derivatives exchanges make it easier for investors to trade futures by offering a regulated marketplace with established rules.


Leading derivatives exchange CME Group announced on Tuesday that it will launch Bitcoin futures by the end of 2017, pending regulatory approval. This comes only a few months after another major exchange, namely CBOE, unveiled that it would be introducing Bitcoin futures also. These launches have the potential to be incredibly fruitful for cryptocurrency traders, as “futures” will offer investors new ways to bet on Bitcoin as well as ways to bet against it, which is very difficult to do in the current trading climate.


As such, investors interested in cryptocurrency should definitely maintain a close eye on the unfolding of these new developments, in that trading on a derivatives exchange is a huge step forward in Bitcoin becoming a fully-fledged financial product. Bitcoin futures would be traded alongside futures of other commodities, which would help facilitate Wall Street banks to run Bitcoin trading desks as they could mitigate their exposure to Bitcoin using futures. Thus, it would become easier for traditional institutional investors, such as asset managers, to bet on the price of Bitcoin going up or down. So, the futures deal is important as it feeds into the growing ecosystem surrounding cryptocurrency.


What’s more, Bitcoin itself benefits from having futures. That is, the benefit of derivatives trading will include greater liquidity, which in theory promotes more accurate pricing of Bitcoin. Additionally, with new regulatory measures more investors should begin using the currency, and more crucially, will be able to bet against it. Nonetheless, there are definitely a few opponents to Bitcoin being traded on the derivatives exchange. Joe Saluzzi, a principal at Themis Trading, claims that Wall Street is essentially “trying to package something up and put a derivative label on it when they really don’t know what’s underneath”.


Saluzzi, amongst others, is concerned that although Bitcoin operates in the essentially unregulated universe of digital currencies, the CME’s stamp of approval could legitimize the cryptocurrency and persuade regulators to approve a growing list of requests for ETFs. Saluzzi fears that if Bitcoin’s deal with the CME goes ahead, it could bring the currency out of the arena of futures markets, where investors should be well aware of the risks involved in trading cryptocurrency, and into the mainstream of investment, where the ETF industry has attracted $3.3 trillion of investor cash so far.


Nonetheless, despite such concerns, the CME does have it’s own pricing system, namely the Bitcoin Reference Rate or BRR. According to Timo Schlaefer, CEO of Crypto Facilities, “the BRR has proven to reliably and transparently reflect global bitcoin-dollar trading and has become the price reference of choice for financial institutions, including firms and data providers worldwide”. So, despite its somewhat dubious future, Bitcoin’s positioning on a derivatives exchange could very well be the primordial spark needed to ignite its foray into the world of well-regulated trading.


(By: Kathleen Craig, Research)

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