Getting started with blockchain | What is Bitcoin Futures?

What is futures?

Usually, when you buy something, the trade will immediately “settlement”. I will give you $5, you give me three eggplants and the deal is over.

Futures contracts are a bit different. We are not billing now, but we agree to settle at a specific price at a specific time in the future .

The counterparty is obliged to fulfill the terms of the contract at maturity, that is, once the contract expires, the asset must be bought or sold at a predetermined price. Futures contracts are traded on regulated exchanges and regulated by regulators.

A futures contract consists of two parts – the price and the delivery date.

If I agree to buy 3 eggplants (the underlying asset) for 5 dollars (price) next Monday (delivery date), this is equivalent to a futures contract. There are other details you need to know, but this is the essence of futures contracts.

Who will use the futures contract?

There are two main types of users of futures contracts.
1. Producers and consumers who want to hedge prices For example, if you grow tobacco, you might sell tobacco futures so that you can lock in your tobacco prices to prevent tobacco prices from falling when you bring the tobacco to market.

On the other hand, if you produce cigarettes, you might buy tobacco futures so you can lock in the cost of buying tobacco.

In both cases, you are using futures to hedge against future price changes.

For such futures users, buying futures hedge prices rises, and selling futures hedge prices fall .

In the above example, the tobacco-growing party hedges the fall in tobacco prices by selling tobacco futures, while the cigarette-producing party hedges the rise in tobacco prices by purchasing tobacco futures.

2. Traders who want speculative futures price movements

Another group that buys and sells futures is short-term traders, portfolio managers, hedge funds, and speculators in other institutions. Speculators are attracted to futures because of the high leverage of futures and relatively fast price fluctuations .

Speculators don't actually deliver the underlying assets (I can sell oil futures without having to deliver a barrel of oil), and traditional futures contracts are usually settled in cash.

Bitcoin futures is also a futures contract that can be used to speculatively change the price of bitcoin, and participating investors do not need to actually hold bitcoin. Investors in Bitcoin futures are essentially betting on the price of Bitcoin for a specific period in the future.

Current bitcoin futures (such as bitcoin futures launched by CME, BitMEX, OKEx, Nasdaq, etc.) are also cash settled, but Bitcoin futures are expected to achieve bitcoin settlement through exchanges such as Bakkt, LidgerX and ErisX in the future (physical Delivery).

What are the benefits of futures trading?

The leverage ratio of futures contracts is high , which means that traders can take advantage of the price fluctuations of all contracts by simply taking out a small portion of the entire contract as a margin. This allows traders to control larger positions with a small amount of money.
In addition, the futures market allows traders to go short – if the asset price falls, the trader can basically make a profit. When you want to short traditional stocks or cryptocurrencies, you must first hold the underlying assets and pay interest; but futures are not. Therefore, futures have greatly reduced the friction of short selling.

Is futures leveraged?

Yes, as mentioned above, one of the striking aspects of futures is that you can control large amounts of assets with a small amount of cash. It works by the fact that you must retain a certain percentage of the value of the futures contract in the margin account. On the Chicago Mercantile Exchange (CME) bitcoin futures, this ratio is set at 35%.
Futures trading implements a margin system . Because of the existence of the margin system, futures trading is actually a “leverage transaction”. The so-called leveraged trading is “small and big”. When investors buy and sell futures contracts, they do not need to pay all the funds of the contract value, but only receive a corresponding amount of trading margin according to a certain ratio of the contract value (in reality, it is only frozen, and will be released after closing) , you can trade multiple times the margin amount. This feature makes futures trading highly profitable and risky. The lower the margin ratio, the greater the leverage effect, and the more obvious the characteristics of high returns and high risks.

Can I buy Bitcoin futures?

Yes, for example, the Chicago Mercantile Exchange (CME) bitcoin contract size is 5 BTC, so assuming the current BTC price is $14,000, then the value of each CME bitcoin contract is $70,000. At the 35% margin requirement, you need to maintain a margin balance of $24,500 to hold a bitcoin futures contract.
It's important to remember that if the price is not good for you, you will be asked to increase your margin balance to stay above the threshold (ie the margin value) . All of this means that, from a financial perspective, the futures market will not offer futures contracts to a large number of retail investors – it is more suitable for individuals and institutions with strong financial resources, which can withstand more than $10,000 without fear. The fall.

How will futures prices be linked to bitcoin prices?

Usually, the futures price is close to the "spot" price (spot price = the current price of the underlying asset).
Typically, the futures price is slightly higher than the spot price . This is because holding an asset is costly, for example, you have to store your assets securely (sometimes it is not easy to store Bitcoin securely). In addition, you also lost potential interest on the funds used to purchase the contract.

So when you buy a futures contract, you get the benefit of the assets held by others, and at the same time you can use your funds elsewhere and get interest, which is why futures contracts usually have a price that is better than the spot contract. Higher.

How will futures affect the price of Bitcoin?

This is a very important issue.
In the long run, Bitcoin futures should improve market efficiency and reduce the volatility of Bitcoin. But in the short term, we may see volatility rise as a new group of participants can enter the market through Bitcoin contracts, and they can either go long or short.

LidgerX postpones launch of bitcoin futures for physical delivery

The LedgerX exchange admitted on Thursday that it did not launch bitcoin futures for physical delivery as previously claimed. Earlier, the US Commodity Futures Trading Commission (CFTC) said it did not approve the exchange to introduce bitcoin futures.
LedgerX has previously said that it plans to launch the first physical bitcoin futures contract in the United States on Wednesday, but this Thursday admitted that it could not be launched as scheduled without approval from the CFTC. Bitcoin futures for physical delivery are contracts that are delivered in real bitcoin (rather than cash). LedgerX CEO Paul Chou said on Monday: "These bitcoin futures are not only physically delivered, because our customers can get bitcoin after the expiration of futures, and they can also deposit in bitcoin for trading. ”

But on Thursday morning, CFTC Chief Communications Officer Michael Short said in an e-mailed statement: "LedgerX has not yet been approved by the committee."

In fact, just look at LedgerX's data page and you'll see that only options and swaps occur on Wednesday, and there are no futures trades.

Subsequently, the company's chief operating and risk officer Juthica Chou admitted that the company has not yet traded futures contracts. She said: "We are still operating, we are pushing products to the retail market."

The CFTC approved LedgerX as the designated contract market (DCM) last month, which is one of the two approvals the company needs to continue to launch futures. Another requirement that needs to be approved is to modify the license that has been registered as a Derivatives Clearing Organization (DCO).

LedgerX is currently authorized to liquidate swap contracts, but has not yet been authorized to liquidate futures contracts. In a press release issued by the CFTC on June 25, the regulator stated:

“Since July 2017, LedgerX has been registered as a Derivatives Clearing Organization (DCO), and since June 24, 2019, LedgerX has also been registered as a designated contract market (DCM)… LedgerX has requested CFTC The registration was modified by the DCO to allow LedgerX to clear the futures listed on its DCM because the DCO license limits LedgerX's clearing range to swap transactions."

According to the CFTC, the regulator has 180 days to approve or reject applications for DCO.

Juthica Chou said: "We submitted the amendment on November 8, 2018. It has been more than 180 days. We don't know why this happened [not approved]." Juthica seems to imply that due to this period Already, without the opposition of the CFTC, the company believes it is clear that it can continue.

But a senior CFTC official said that LedgerX needs to be explicitly approved. The official, who asked not to be named, said: "Every new or modified DCO application must be explicitly approved by the CFTC. Failure to make a decision does not imply approval."

Despite this, the senior official said that LedgerX's DCO application "appears to be in the final stages of the approval process."

Bakkt will launch physical delivery of bitcoin futures "in the near future"

Bitrey's parent company, Bakkt's parent company, Intercontinental Exchange (ICE) head Jeffrey Sprecher said on Thursday that Bitcoin futures platform Bakkt is preparing to launch a physical delivery bitcoin futures contract soon, but he did not give specific time. table.
Jeffrey Sprecher said in a quarterly earnings conference call that Bakkt is "working to develop a regulated ecosystem that serves the changing needs of the global (participants)." He added: "After obtaining the final approval of the regulator, we It is planned to launch bitcoin futures for physical delivery in the near future." ICE first announced in August last year that it will launch an ambitious plan to establish a bitcoin futures contract for the Bitcoin futures exchange Bakkt and provide physical delivery. Will work with Microsoft, Starbucks and BCG Consulting.

Although ICE originally planned to launch the Bakkt platform in December 2018, Bakkt has been postponed several times and there is no definite date for launch. Recently, the Bakkt Bitcoin futures contract is undergoing testing.

Bakkt originally intended to approve its futures contract through the Commodity Futures Trading Commission (CFTC), but has not yet obtained the CFTC-approved custodian status. CFTC Chairman Christopher Giancarlo has talked about the reasons for Bakkt being blocked. He said that one of the challenges facing the organization is to evaluate futures. How the exchange stores cryptocurrencies.

The company is currently awaiting a trust license issued by the New York Financial Services Department (NYDFS). Once NYDFS approves Bakkt's delivery warehouse, the company will be able to launch a bitcoin futures contract for physical delivery.

However, the company is facing competition: ErisX, supported by TD Ameritrade, also plans to launch a bitcoin futures contract for physical delivery, while the LedgerX team, which was originally scheduled to launch a physical delivery bitcoin futures contract on Wednesday, was also “not approved by the CFTC”. And delay.

In addition, ICE Chief Financial Officer Scott Hill said ICE plans to launch the ETF Hub in the coming months, which is a gateway for traders to participate in the exchange-traded fund (ETF) market. The company believes that the ETF market may double in the next few years.

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