Bitcoin Futures Raise Complex Questions

December 08, 2017

The hottest financial asset of 2017 keeps getting hotter. Bitcoin, the world's first and largest cryptocurrency, surged to nearly $17,000 on Thursday, more than double the price from two weeks ago and 20 times the price from a year ago. On Friday, bitcoin's price stood at $15,676.

If anything, the parabolic move higher in bitcoin seems to be accelerating, which few would have thought possible after the cryptocurrency shattered previous milestones with ease. The latest push to new records is being fueled by one thing, according to analysts: anticipation of bitcoin futures.

On Sunday, the Cboe Futures Exchange will begin trading bitcoin futures (ticker symbol XBT), the first mainstream financial products tied to bitcoin. CFE is owned by Cboe Global Markets, one of the largest exchange operators in the world, and the parent company of Cboe's bitcoin futures contracts will launch one week ahead of similar products from the competing Chicago Mercantile Exchange.

Bitcoin bulls are betting that the introduction of bitcoin futures will ignite a new wave of demand from institutions and other investors who were unable or unwilling to buy bitcoin outside of the highly regulated, traditional financial system.

A successful launch of bitcoin futures could also open the door to a bitcoin ETF sometime next year, which could then invite billions of more dollars into the cryptocurrency.

More Balanced Market

However, there are those who are not convinced that bitcoin futures will undoubtedly send prices up. In fact, some believe bitcoin futures could put downward pressure on bitcoin prices, or at the very least, create a more balanced market with less volatility.

"Futures are most useful when the market for the underlying asset is volatile, and that's certainly the case with bitcoin," said David Yermack, professor of finance and business transformation at New York University Stern School of Business. "These products are likely to stabilize the market and provide ways for people to bet against the continued rise of bitcoin—something that has been missing from the market up to now. I expect a lot of investor interest in these contracts, and subsequent futures listings for other cryptocurrencies such as ethereum."

Currently, the vast majority of market participants in bitcoin own the digital currency outright. In trading parlance, they are “long,” which means they profit when the price rises.

It's possible to do the opposite, go “short” bitcoin and profit from price declines. Certain exchanges, such as Bitfinex—the world's largest cryptocurrency exchange—provide the option to borrow bitcoin and sell short, but it requires a margin account and is not widely used.

In contrast, in the futures market, there will always be a long and a short for every bitcoin futures contract.

Cboe's bitcoin futures contracts will be settled in cash after their expiration date, with the value of the contracts determined based on bitcoin prices at the Gemini Exchange.


Find your next ETF

Reset All